e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
Or
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-51541
GENOMIC HEALTH, INC.
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
77-0552594 |
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer Identification No.) |
301 Penobscot Drive
Redwood City, California 94063
(Address of principal executive offices, including Zip Code)
(650) 556-9300
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). YES o NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated filer o
|
|
Accelerated filer þ
|
|
Non-accelerated filer o
|
|
Smaller reporting company o |
|
|
|
|
(Do not check if a smaller reporting company) |
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). YES o NO þ
The number of outstanding shares of the registrants Common Stock, $0.0001 par value, was
28,823,369 as of July 30, 2010.
GENOMIC HEALTH, INC.
INDEX
2
PART 1: FINANCIAL INFORMATION
Item 1. Financial Statements
GENOMIC HEALTH, INC.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
15,174 |
|
|
$ |
9,082 |
|
Short-term investments |
|
|
46,714 |
|
|
|
48,366 |
|
Accounts receivable (net of allowance for
doubtful accounts; 2010 - $712, 2009 - $545) |
|
|
12,312 |
|
|
|
11,123 |
|
Prepaid expenses and other current assets |
|
|
5,882 |
|
|
|
5,677 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
80,082 |
|
|
|
74,248 |
|
Property and equipment, net |
|
|
11,829 |
|
|
|
12,865 |
|
Restricted cash |
|
|
500 |
|
|
|
500 |
|
Other assets |
|
|
525 |
|
|
|
494 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
92,936 |
|
|
$ |
88,107 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
3,225 |
|
|
$ |
1,304 |
|
Accrued compensation |
|
|
4,833 |
|
|
|
6,188 |
|
Accrued license fees |
|
|
2,498 |
|
|
|
3,016 |
|
Accrued expenses and other current liabilities |
|
|
5,246 |
|
|
|
5,736 |
|
Deferred revenues |
|
|
2,238 |
|
|
|
2,238 |
|
Note payable |
|
|
105 |
|
|
|
225 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
18,145 |
|
|
|
18,707 |
|
Other liabilities |
|
|
1,015 |
|
|
|
891 |
|
Commitments (Note 5) |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Common stock |
|
|
2 |
|
|
|
2 |
|
Additional paid-in capital |
|
|
252,723 |
|
|
|
246,383 |
|
Accumulated other comprehensive income |
|
|
13 |
|
|
|
19 |
|
Accumulated deficit |
|
|
(178,962 |
) |
|
|
(177,895 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
73,776 |
|
|
|
68,509 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
92,936 |
|
|
$ |
88,107 |
|
|
|
|
|
|
|
|
See accompanying notes.
3
GENOMIC HEALTH, INC.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues |
|
$ |
42,514 |
|
|
$ |
35,191 |
|
|
$ |
82,779 |
|
|
$ |
68,618 |
|
Contract revenues |
|
|
925 |
|
|
|
1,361 |
|
|
|
1,888 |
|
|
|
1,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
43,439 |
|
|
|
36,552 |
|
|
|
84,667 |
|
|
|
70,448 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues |
|
|
8,107 |
|
|
|
7,891 |
|
|
|
17,073 |
|
|
|
15,719 |
|
Research and development |
|
|
7,980 |
|
|
|
9,243 |
|
|
|
15,773 |
|
|
|
17,888 |
|
Selling and marketing |
|
|
17,517 |
|
|
|
15,709 |
|
|
|
35,532 |
|
|
|
30,406 |
|
General and administrative |
|
|
8,752 |
|
|
|
7,651 |
|
|
|
17,079 |
|
|
|
14,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
42,356 |
|
|
|
40,494 |
|
|
|
85,457 |
|
|
|
79,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
1,083 |
|
|
|
(3,942 |
) |
|
|
(790 |
) |
|
|
(8,554 |
) |
Interest and other income |
|
|
57 |
|
|
|
213 |
|
|
|
165 |
|
|
|
462 |
|
Interest and other expense |
|
|
(24 |
) |
|
|
(34 |
) |
|
|
(45 |
) |
|
|
(86 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
1,116 |
|
|
|
(3,763 |
) |
|
|
(670 |
) |
|
|
(8,178 |
) |
Provision for income taxes |
|
|
(251 |
) |
|
|
(180 |
) |
|
|
(396 |
) |
|
|
(390 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
865 |
|
|
$ |
(3,943 |
) |
|
$ |
(1,066 |
) |
|
$ |
(8,568 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
0.03 |
|
|
$ |
(0.14 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share |
|
$ |
0.03 |
|
|
$ |
(0.14 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic net income (loss) per share |
|
|
28,794 |
|
|
|
28,541 |
|
|
|
28,759 |
|
|
|
28,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted net income (loss) per share |
|
|
29,627 |
|
|
|
28,541 |
|
|
|
28,759 |
|
|
|
28,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
4
GENOMIC HEALTH, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Operating activities |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,066 |
) |
|
$ |
(8,568 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
3,461 |
|
|
|
3,175 |
|
Employee stock-based compensation |
|
|
5,391 |
|
|
|
5,056 |
|
Non-employee stock-based compensation |
|
|
15 |
|
|
|
34 |
|
Gain on disposal of property and equipment |
|
|
(45 |
) |
|
|
(43 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(1,189 |
) |
|
|
869 |
|
Prepaid expenses and other assets |
|
|
(288 |
) |
|
|
(409 |
) |
Accounts payable |
|
|
1,921 |
|
|
|
633 |
|
Accrued expenses and other liabilities |
|
|
(366 |
) |
|
|
535 |
|
Accrued license fees |
|
|
(518 |
) |
|
|
(162 |
) |
Accrued compensation |
|
|
(1,355 |
) |
|
|
1,772 |
|
Deferred revenues |
|
|
|
|
|
|
(1,830 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
5,961 |
|
|
|
1,062 |
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(2,329 |
) |
|
|
(1,412 |
) |
Purchases of short-term investments |
|
|
(36,224 |
) |
|
|
(31,319 |
) |
Maturities of short-term investments |
|
|
37,870 |
|
|
|
32,300 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(683 |
) |
|
|
(431 |
) |
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Principal payments of notes payable |
|
|
(120 |
) |
|
|
(1,099 |
) |
Proceeds from issuance of common stock under stock plans |
|
|
934 |
|
|
|
663 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
814 |
|
|
|
(436 |
) |
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
6,092 |
|
|
|
195 |
|
Cash and cash equivalents at the beginning of the period |
|
|
9,082 |
|
|
|
11,171 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the period |
|
$ |
15,174 |
|
|
$ |
11,366 |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
10 |
|
|
$ |
86 |
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
546 |
|
|
$ |
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
GENOMIC HEALTH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
Note 1. Organization and Summary of Significant Accounting Policies
The Company
Genomic Health, Inc. (the Company) is a life science company focused on the global
development and commercialization of genomic-based clinical diagnostic tests for cancer that allow
physicians and patients to make individualized treatment decisions. The Company was incorporated in
Delaware in August 2000. The Companys first product, the Oncotype DX breast cancer test, was
launched in 2004 and is used for early stage breast cancer patients to predict the likelihood of
breast cancer recurrence and the likelihood of chemotherapy benefit. In January 2010, the Company
launched its second product, the Oncotype DX colon cancer test, a multigene expression test
developed to assess the risk of recurrence in patients with stage II disease.
Principles of Consolidation
The condensed consolidated financial statements include all the accounts of the Company and
its wholly-owned subsidiaries. The Company has two wholly-owned subsidiaries, Genomic Health
International LLC, a European subsidiary that was established in 2009 to support the Companys
international sales and marketing efforts, and Oncotype Laboratories, Inc., which was established
in 2003 and is inactive. The functional currency for the Companys European subsidiary is the U.S.
dollar. All significant intercompany balances and transactions have been eliminated.
Basis of Presentation and Use of Estimates
The accompanying interim period condensed consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States (GAAP). The
condensed consolidated balance sheet as of June 30, 2010, condensed consolidated statements of
operations for the three and six months ended June 30, 2010 and 2009 and condensed consolidated
statements of cash flows for the six months ended June 30, 2010 and 2009 are unaudited, but include
all adjustments, consisting only of normal recurring adjustments, which the Company considers
necessary for a fair presentation of its financial position, operating results and cash flows for
the periods presented. The condensed consolidated balance sheet at December 31, 2009 has been
derived from audited financial statements. However, it does not include certain information and
notes required by GAAP for complete consolidated financial statements.
The preparation of financial statements in conformity with GAAP requires management to make
judgments, assumptions and estimates that affect the amounts reported in the Companys condensed
consolidated financial statements and accompanying notes. Actual results could differ materially
from those estimates.
Revenue Recognition
The Company derives its revenues from product sales and contract research arrangements. The
Company operates in one industry segment. Substantially all of the Companys historical product
revenues have been derived from the sale of Oncotype DX breast cancer tests. The Company generally
bills third-party payors upon generation and delivery of a Recurrence Score report to the
physician. As such, the Company takes assignment of benefits and the risk of collection with the
third-party payor. The Company usually bills the patient directly for amounts owed after multiple
requests for payment have been denied or only partially paid by the insurance carrier. The Company
pursues case-by-case reimbursement where policies are not in place or payment history has not been
established.
The Companys product revenues for tests performed are recognized when the following revenue
recognition criteria are met: (1) persuasive evidence that an arrangement exists; (2) delivery has
occurred or services have been rendered; (3) the fee is fixed or determinable; and (4)
collectibility is reasonably assured. Criterion (1) is satisfied when the Company has an
arrangement to pay or a contract with the payor in place addressing reimbursement for the Oncotype
DX test. In the absence of such arrangements, the
6
Company considers that criterion (1) is satisfied
when a third-party payor pays the Company for the test performed. Criterion (2) is satisfied when
the Company performs the test and generates and delivers to the physician, or makes available on
its web portal, a
Recurrence Score report. Determination of criteria (3) and (4) is based on managements
judgments regarding whether a contractual agreement has been entered into and the fee charged for
products or services delivered is fixed or determinable, and the collectibility of those fees under
any contract or agreement. When evaluating collectibility, the Company considers whether it has
sufficient history to reliably estimate a payors individual payment patterns. Based upon at least
several months of payment history, the Company reviews the number of tests paid against the number
of tests billed and the payors outstanding balance for unpaid tests to determine whether payments
are being made at a consistently high percentage of tests billed and at appropriate amounts given
the contracted payment amount. To the extent all criteria set forth above are not met when test
results are delivered, product revenues are recognized when cash is received from the payor.
As of June 30, 2010, the Company had distributor agreements in 13 countries outside of the
U.S. The distributor provides certain marketing and administrative services for the Company within
its territory. As a condition of these agreements, the distributor pays the Company an agreed upon
fee per test and the Company processes the tests. The same revenue recognition criteria described
above generally apply to tests received through international distributors. Product revenues for
tests performed are recognized on an accrual basis when the following revenue recognition criteria
are met: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred or services
have been rendered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably
assured. To the extent all criteria set forth above are not met when test results are delivered,
product revenues are generally recognized when cash is received from the distributor.
From time to time, the Company receives requests for refunds of payments, generally due to
overpayments made by third-party payors. Upon becoming aware of a refund request, the Company
establishes an accrued liability for tests covered by the refund request until such time as the
Company determines whether or not a refund is due. Accrued refunds were $481,000 and $757,000 at
June 30, 2010 and December 31, 2009, respectively.
Contract revenues are generally derived from studies conducted with biopharmaceutical and
pharmaceutical companies. The specific methodology for revenue recognition is determined on a
case-by-case basis according to the facts and circumstances applicable to a given contract. Under
certain contracts, the Companys input, measured in terms of full-time equivalent level of effort
or running a set of assays through its clinical reference laboratory under a contractual protocol,
triggers payment obligations, and revenues are recognized as costs are incurred or assays are
processed. Certain contracts have payments that are triggered as milestones are completed, such as
completion of a successful set of experiments. Milestones are assessed on an individual basis and
revenue is recognized when these milestones are achieved, as evidenced by acknowledgment from
collaborators, provided that (1) the milestone event is substantive and its achievability was not
reasonably assured at the inception of the agreement and (2) the milestone payment is
non-refundable. Where separate milestones do not meet these criteria, the Company typically
defaults to a performance-based model, such as revenue recognition following delivery of effort as
compared to an estimate of total expected effort.
Advance payments received in excess of revenues recognized are classified as deferred revenue
until such time as the revenue recognition criteria have been met.
Allowance for Doubtful Accounts
The Company accrues an allowance for doubtful accounts against its accounts receivable based
on estimates consistent with historical payment experience. Bad debt expense is included in general
and administrative expense on the Companys condensed consolidated statements of operations.
Accounts receivable are written off against the allowance when the appeals process is exhausted,
when an unfavorable coverage decision is received or when there is other substantive evidence that
the account will not be paid. As of June 30, 2010 and December 31, 2009, the Companys allowance
for doubtful accounts was $712,000 and $545,000, respectively. Write-offs for doubtful accounts of
$534,000 and $944,000 were recorded against the allowance during the three and six months ended
June 30, 2010, respectively, and write-offs of $475,000 and $800,000 were recorded during the three and six months ended June
30, 2009, respectively. Bad debt expense was $632,000 and $1.1 million for the three and six months
ended June 30, 2010, respectively and $395,000 and $543,000 for the three and six months ended June
30, 2009, respectively.
7
Research and Development Expenses
Research and development expenses are comprised of the following types of costs incurred in
performing research and development activities: salaries and benefits, allocated overhead and
facility occupancy costs, contract services, reagents and laboratory supplies, and costs to acquire
in-process research and development projects and technologies that have no alternative future use.
Research and development expenses also include costs related to activities performed under
contracts with biopharmaceutical and pharmaceutical companies. Research and development costs are
expensed as incurred.
The Company enters into collaboration and clinical trial agreements with clinical
collaborators and records these costs as research and development expenses. The Company records
accruals for estimated study costs comprised of work performed by its collaborators under contract
terms. Advance payments for goods or services that will be used or rendered for future research and
development activities are deferred and capitalized and recognized as an expense as the goods are
delivered or the related services are performed.
Recently Issued Accounting Pronouncements
In April 2010, the Financial Accounting Standards Board (FASB) issued authoritative guidance
for applying the milestone method of revenue recognition to research and development arrangements.
Under this guidance, revenue contingent upon the achievement of a milestone in its entirety may be
recognized in the period in which the milestone is achieved only if the milestone meets all the
criteria within the guidance to be considered substantive. This guidance is effective on a
prospective basis for research and development milestones achieved in fiscal years, and interim
periods within those years, beginning on or after June 15, 2010. This guidance, for which the
Company is currently assessing the impact on its financial condition and results of operations,
will become effective for the Company on January 1, 2011.
In October 2009, FASB issued authoritative guidance that amends existing guidance for
identifying separate deliverables in a revenue-generating transaction where multiple deliverables
exist, and provides guidance for allocating and recognizing revenue based on those separate
deliverables. The guidance is expected to result in more multiple-deliverable arrangements being
separable than under current guidance and is required to be applied prospectively to new or
significantly modified revenue arrangements. This guidance, which the Company does not expect to
have a material impact on its financial condition and results of operations, will become effective
for the Company on January 1, 2011.
Note 2. Net Income (Loss) Per Share
Basic net income (loss) per share is calculated by dividing net income (loss) for the period
by the weighted-average number of common shares outstanding for the period without consideration
for potential common shares. Diluted net income (loss) per share is calculated by dividing net
income (loss) by the weighted-average number of common shares outstanding for the period and
dilutive potential common shares for the period determined using the treasury-stock method. The
following table is a reconciliation of the numerator and denominator used in the calculation of
basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
(In thousands) |
|
|
|
|
(In thousands) |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
865 |
|
|
$ |
(3,943 |
) |
|
$ |
(1,066 |
) |
|
$ |
(8,568 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of common
stock outstanding used in the
calculation of basic net income
(loss) per share |
|
|
28,794 |
|
|
|
28,541 |
|
|
|
28,759 |
|
|
|
28,519 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase common stock |
|
|
833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of common
stock outstanding used in the
calculation of diluted net income
(loss) per share |
|
|
29,627 |
|
|
|
28,541 |
|
|
|
28,759 |
|
|
|
28,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase approximately 4.2 million weighted-average shares of the Companys common
stock were outstanding during the three months ended June 30, 2010, but are not included in the
computation of diluted net income per share because the options exercise prices were greater than
the average market price of the Companys common stock during these periods; therefore, their
effect is anti-dilutive.
8
Options to purchase 5.6 million shares of the Companys common stock were outstanding as of
June 30, 2010, but are not included in the calculation of diluted net loss per share for the six
months ended June 30, 2010 because their effect is anti-dilutive. Options to purchase 4.2 million
shares of the Companys common stock were outstanding as of June 30, 2009, but are not included in
the computation of diluted net loss per share for the three and six months ended June 30, 2009
because their effect is anti-dilutive.
Comprehensive Income (Loss)
The Company reports comprehensive income (loss) and its components as part of total
stockholders equity.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
|
(In thousands) |
|
Net income (loss) |
|
$ |
865 |
|
|
$ |
(3,943 |
) |
|
$ |
(1,066 |
) |
|
$ |
(8,568 |
) |
Change in unrealized gain on available-for-sale securities |
|
|
7 |
|
|
|
(23 |
) |
|
|
(6 |
) |
|
|
(155 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
872 |
|
|
$ |
(3,966 |
) |
|
$ |
(1,072 |
) |
|
$ |
(8,723 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 3. Fair Value Measurements
The Company measures certain financial assets, including cash equivalents and
available-for-sale securities, at their fair value. The fair value of these financial assets was
determined based on three levels of inputs, of which the first two are considered observable and
the last unobservable, as follows:
Level 1: Quoted prices in active markets for identical assets or liabilities.
Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar
assets or liabilities, quoted prices in markets that are not active, or other inputs that are
observable or can be corroborated by observable market data for substantially the full term of
the assets or liabilities.
Level 3: Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.
The Company did not have any non-financial assets or liabilities that were measured or
disclosed at fair value on a recurring basis at June 30, 2010 or December 31, 2009. Assets and
liabilities measured at fair value are classified in their entirety based on the lowest level of
input that is significant to the fair value measurement. The Companys assessment of the
significance of a particular input to the fair value measurement in its entirety requires
management to make judgments and considers factors specific to the asset or liability. The
following tables set forth the Companys financial instruments that were measured at fair value on
a recurring basis at June 30, 2010 and December 31, 2009 by level within the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actively Quoted |
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
|
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
|
Balance at |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
June 30, 2010 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
As of June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market deposits |
|
$ |
6,969 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
6,969 |
|
U.S. Treasury securities |
|
|
5,266 |
|
|
|
|
|
|
|
|
|
|
|
5,266 |
|
Debt securities of U.S. government-sponsored entities |
|
|
|
|
|
|
43,453 |
(1) |
|
|
|
|
|
|
43,453 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,235 |
|
|
$ |
43,453 |
|
|
$ |
|
|
|
$ |
55,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actively Quoted |
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
Markets for |
|
|
Significant Other |
|
|
Unobservable |
|
|
|
|
|
|
Identical Assets |
|
|
Observable Inputs |
|
|
Inputs |
|
|
Balance at |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market deposits |
|
$ |
6,011 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
6,011 |
|
U.S. Treasury securities |
|
|
4,546 |
|
|
|
|
|
|
|
|
|
|
|
4,546 |
|
Debt securities of U.S. government-sponsored entities |
|
|
|
|
|
|
44,820 |
(2) |
|
|
|
|
|
|
44,820 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,557 |
|
|
$ |
44,820 |
|
|
$ |
|
|
|
$ |
55,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes a debt security with a fair value of $2,005,655 that matured within three
months of June 30, 2010 and was classified as cash equivalents on the condensed
consolidated balance sheet at June 30, 2010. |
|
(2) |
|
Includes a debt security with a fair value of $1,000,000 that matured within three
months of December 31, 2009 and was classified as cash equivalents on the condensed
consolidated balance sheet at December 31, 2009. |
The Companys debt securities of U.S. government-sponsored entities are classified as Level 2
as they are valued using multi-dimensional relational pricing models that use observable market
inputs, including benchmark yields, reported trades, broker-dealer quotes, issuer spreads,
benchmark securities, bids, offers and reference data. Not all inputs listed are available for use
in the evaluation process on any given day for each security evaluation. In addition, market
indicators, industry and economic events are monitored and may serve as a trigger to acquire
further corroborating market data. There were no transfers between Level 1 and Level 2 categories
during the six months ended June 30, 2010.
The following tables illustrate the Companys available-for-sale securities as of the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Debt securities of U.S. government-sponsored entities |
|
$ |
43,441 |
|
|
$ |
13 |
|
|
$ |
(1 |
) |
|
$ |
43,453 |
|
U.S. Treasury securities |
|
|
5,266 |
|
|
|
|
|
|
|
|
|
|
|
5,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
48,707 |
|
|
$ |
13 |
|
|
$ |
(1 |
) |
|
$ |
48,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Fair Value |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Debt securities of U.S. government-sponsored entities |
|
$ |
43,800 |
|
|
$ |
29 |
|
|
$ |
(9 |
) |
|
$ |
43,820 |
|
U.S. Treasury securities |
|
|
4,547 |
|
|
|
|
|
|
|
(1 |
) |
|
|
4,546 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
48,347 |
|
|
$ |
29 |
|
|
$ |
(10 |
) |
|
$ |
48,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had no realized gains or losses on its available-for-sale securities for the three
and six months ended June 30, 2010 and 2009, respectively.
As of June 30, 2010, all of the Companys available-for-sale securities had contractual
maturities of one year or less.
Note 4. Collaboration and Commercial Technology Licensing Agreements
The Company has entered into a variety of collaboration and specimen transfer agreements
relating to its development efforts. The Company recorded collaboration expenses of $567,000 and
$1.2 million for the three and six months ended June 30, 2010, respectively, and $891,000 and $1.5
million for the three and six months ended June 30, 2009, respectively, relating to services
provided in connection with these agreements. In addition to these expenses, some of the agreements
contain provisions for royalties from inventions resulting from these collaborations. The Company
has specified options and rights relating to joint inventions arising out of the collaborations.
10
The Company is a party to various agreements under which it licenses technology on a
nonexclusive basis in the field of human diagnostics. Access to these licenses enables the Company
to process its Oncotype DX tests. While certain agreements contain provisions for fixed annual
payments, license fees are generally calculated as a percentage of product revenues, with rates
that vary by agreement and may be tiered, and payments that may be capped at annual minimum or
maximum amounts. The Company recognized costs recorded under these agreements of $2.1 million and
$5.0 million for the three and six months ended June 30, 2010, respectively, and $2.4 million and
$4.7 million for the three and six months ended June 30, 2009, respectively, which were included in
cost of product revenues. License fees for the three and six months ended June 30, 2010 reflected
the discontinuance of payments under an existing agreement due to the abandonment of a patent by
the licensor.
At June 30, 2010, future fixed annual payments, exclusive of royalty payments, relating to the
launch and commercialization of Oncotype DX breast cancer tests and Oncotype DX colon cancer tests
totaled $2.3 million and were payable as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oncotype Dx |
|
|
Oncotype Dx |
|
|
Total Fixed Future |
|
|
|
Breast Cancer |
|
|
Colon Cancer |
|
|
Annual Payments |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Payment Due: |
|
|
|
|
|
|
|
|
|
|
|
|
January 2011 |
|
$ |
475 |
|
|
$ |
200 |
|
|
$ |
675 |
|
January 2012 |
|
|
|
|
|
|
300 |
|
|
|
300 |
|
January 2013 |
|
|
|
|
|
|
450 |
|
|
|
450 |
|
January 2014 |
|
|
|
|
|
|
450 |
|
|
|
450 |
|
January 2015 |
|
|
|
|
|
|
450 |
|
|
|
450 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
475 |
|
|
$ |
1,850 |
|
|
$ |
2,325 |
|
|
|
|
|
|
|
|
|
|
|
These payments are recorded in cost of product revenues as license fees. Expense for payments
included in the table above is recorded ratably over the year before the relevant payment is due.
If at any time the Company discontinues the sale of the products covered by the agreement, no
future annual payments will be payable and the Company will have no further obligation under the
applicable agreements.
Note 5. Commitments
Notes Payable
In March 2005, the Company entered into an arrangement to finance the acquisition of
laboratory and office equipment, computer hardware and software and leasehold improvements. In
connection with this arrangement, the Company granted the lender a security interest in the assets
purchased with the borrowed amounts. The Company can prepay all, but not part of, the amounts
outstanding under the arrangement so long as the Company also pays a 4% premium on the outstanding
principal balance. At June 30, 2010, outstanding payments under this arrangement aggregated
$108,000, reflecting an outstanding notes payable principal balance of $105,000 at an annual
interest rate of 11.30%, which is scheduled to be paid in full by November 2010. According to the
terms of the arrangement, the Company is required to notify the lender if there is a material
adverse change in its financial condition, business or operations. The Company believes it has
complied with all the material covenants of the financing arrangement as of June 30, 2010.
Lease Obligations
In September 2005, the Company entered into a non-cancelable lease for 48,000 square feet of
laboratory and office space that the Company currently occupies in Redwood City, California. The
lease expires in February 2012, with an option for the Company to extend the lease for an
additional five years. The agreement included lease incentive obligations of $834,000 that are
being amortized on a straight-line basis over the life of the lease. In connection with this lease,
the Company was required to secure a $500,000 letter of credit, which is classified as restricted
cash on the condensed consolidated balance sheets.
In January 2007, the Company entered into a non-cancelable lease for an additional 48,000
square feet of office space in a nearby location. The lease expires in February 2012, with an
option for the Company to extend the term of the lease for an additional five years. The agreement
included lease incentive obligations of $283,000 that are being amortized on a straight-line basis
over the life of the lease. In connection with this lease, the Company paid a $151,000 cash
security deposit, which is included in other assets on the condensed consolidated balance sheets.
11
In October 2009, the Company entered into a non-cancelable agreement to lease an additional
30,500 square feet of office space near the locations the Company currently occupies. The lease
commenced on April 1, 2010 and expires in March 2018, with an option for the Company to extend the
term of the lease for an additional five years. The agreement includes lease incentive obligations
of $307,000 which will be amortized on a straight-line basis over the life of the lease. In
connection with this lease, the Company paid a $183,000 cash security deposit, which is included in
other assets on the condensed consolidated balance sheets.
In May 2010, the Companys European subsidiary entered into a non-cancelable lease for
approximately 2,500 square feet of office space in Geneva, Switzerland. The lease commenced on June
1, 2010 and has a term of five years. In connection with this lease,
the Company paid an $87,000 cash security deposit, which is included in other assets on the condensed consolidated balance sheets.
Future non-cancelable commitments under these operating leases at June 30, 2010 were as
follows:
|
|
|
|
|
|
|
Annual |
|
|
|
Payments |
|
|
|
(In thousands) |
|
Years Ending December 31, |
|
|
|
|
2010 (remainder of the year) |
|
$ |
1,134 |
|
2011 |
|
|
2,355 |
|
2012 |
|
|
939 |
|
2013 |
|
|
667 |
|
2014 |
|
|
686 |
|
2015 and thereafter |
|
|
2,309 |
|
|
|
|
|
Total minimum payments |
|
$ |
8,090 |
|
|
|
|
|
Note 6. Stock-Based Compensation
The Company values its stock option grants using the Black-Scholes option valuation model. The
Company recorded employee stock-based compensation expense of $2.8 million and $5.4 million for the
three and six months ended June 30, 2010, respectively, and $2.5 million and $5.1 million for the
three and six months ended June 30, 2009, respectively. Employee stock-based compensation expense
was calculated based on awards ultimately expected to vest and has been reduced for estimated
forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates. Employee stock-based
compensation expense includes expense related to options granted to outside directors of the
Company. The following table presents the impact of employee stock-based compensation expense on
selected statements of operations line items for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Cost of product revenues |
|
$ |
96 |
|
|
$ |
88 |
|
|
$ |
189 |
|
|
$ |
181 |
|
Research and development |
|
|
759 |
|
|
|
770 |
|
|
|
1,466 |
|
|
|
1,540 |
|
Selling and marketing |
|
|
831 |
|
|
|
798 |
|
|
|
1,644 |
|
|
|
1,595 |
|
General and administrative |
|
|
1,092 |
|
|
|
880 |
|
|
|
2,092 |
|
|
|
1,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
2,778 |
|
|
$ |
2,536 |
|
|
$ |
5,391 |
|
|
$ |
5,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock-based compensation expense represents expense related to stock options granted
on or after January 1, 2006, as well as stock options granted prior to, but not yet vested as of,
January 1, 2006. As of June 30, 2010, total unrecognized compensation expense related to unvested
stock options, net of estimated forfeitures, was $19.5 million. The Company expects to recognize
this expense over a weighted-average period of 31 months.
Valuation Assumptions
Option valuation models require the input of highly subjective assumptions that can vary over
time. The Companys assumptions regarding expected volatility are based on the historical
volatility of the Companys common stock. The expected life of options granted is estimated based
on historical option exercise data and assumptions related to unsettled options. The risk-free
interest rate is estimated using published rates for U.S. Treasury securities with a remaining term
approximating the expected life of the options
12
granted. The Company uses a dividend yield of zero as it has never paid cash dividends and
does not anticipate paying cash dividends in the foreseeable future. The Company granted options to
purchase 100,850 and 1,184,298 shares of common stock to employees during the three and six months
ended June 30, 2010 respectively. The Company granted options to purchase 80,350 and 207,550 shares
of common stock to employees and directors during the three and six months ended June 30, 2009,
respectively. The weighted-average fair values and the assumptions used in calculating such values
for stock options granted during these periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Expected volatility |
|
|
50 |
% |
|
|
55 |
% |
|
|
53 |
% |
|
|
56 |
% |
Risk-free interest rate |
|
|
2.18 |
% |
|
|
2.73 |
% |
|
|
2.56 |
% |
|
|
2.17 |
% |
Expected life of options in years |
|
|
5.86 |
|
|
|
5.60 |
|
|
|
5.86 |
|
|
|
5.76 |
|
Weighted-average fair value |
|
$ |
6.89 |
|
|
$ |
9.57 |
|
|
$ |
8.75 |
|
|
$ |
10.30 |
|
Stock Options Exercised
For the three and six months ended June 30, 2010, the Company issued 38,108 and 132,619
shares of common stock in connection with the exercise of stock options with a weighted-average
exercise price of $4.34 and $7.05 per share, respectively. For the three and six months ended June
30, 2009, the Company issued 34,360 and 94,650 shares of common stock in connection with the
exercise of stock options with a weighted-average exercise price of $4.61 and $7.01 per share,
respectively.
Note 7. Income Tax
The Company recorded provision for income taxes of $251,000 and $396,000 for the three and six
months ended June 30, 2010, respectively and $180,000 and $390,000 for the three and six months
ending June 30, 2009, respectively. The provision for income taxes for the three and six months
ended June 30, 2010 was computed using the discrete (or cut-off) method, and was principally
comprised of California alternative minimum tax, other state income taxes and foreign taxes. The
provision for income taxes for the three and six months ended June 30, 2009 was based on the
Companys estimated taxable income for that year, and was principally comprised of federal
alternative minimum tax and California income tax. The change in tax computation method was made
prospectively and was due to the impact of expected quarterly earnings volatility on the Companys
ability to reliably forecast an effective tax rate for 2010. The difference of income tax expense
between the provision and the statutory rate of the Companys loss before income taxes and
provision actually recorded was primarily due to the impact of nondeductible stock-based
compensation expenses. For federal tax purposes, the provision was offset by the net operating loss
carry-forwards that eliminate the federal regular and alternative minimum amounts.
The Company intends to continue maintaining a full valuation allowance on its deferred tax
assets until sufficient evidence exists to support the reversal of all or some portion of these
allowances. Should the actual timing tax differences differ from the Companys estimates, the
amount of its valuation allowance could be materially impacted.
The Company had $685,000 of unrecognized tax benefits at both June 30, 2010 and December 31,
2009, respectively. The Company does not anticipate a material change in its unrecognized tax
benefits over the next twelve months. Unrecognized tax benefits may change during the next twelve
months for items that arise in the ordinary course of business.
The Company will recognize accrued interest and penalties related to unrecognized tax benefits
in income tax expense when and if incurred. As of June 30, 2010, the Company had not recognized any
tax-related penalties or interest in its consolidated balance sheets or statements of operations.
All tax years from 2000 forward remain subject to future examination by federal, state and foreign
tax authorities.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. When used in this report, the words expects, anticipates,
intends, estimates, plans, believes, and similar expressions are intended to identify
forward-looking statements. These are statements that relate to future periods and include
statements about our expectation that, for the foreseeable future, substantially all of our
revenues will be derived from the Oncotype DX breast cancer test;
13
the factors that may impact our financial results; the extent and duration of our net losses
and our ability to achieve sustained profitability; our ability to recognize revenues other than
on a cash basis; our business
strategy and our ability to achieve our strategic goals; our expectations regarding product
revenues; the amount of future revenues that we may derive from Medicare patients or categories of
patients; our plans to pursue reimbursement on a case-by-case basis; our ability, and expectations
as to the amount of time it will take, to achieve successful reimbursement from third-party payors
and government insurance programs for new tests or markets, including for Oncotype DX for N+ breast
cancer patients, Oncotype DX for colon cancer, or for patients outside of the U.S.; our
expectations regarding our international expansion and opportunities, and our expectations
regarding revenues from international sales; our intent to enter into additional foreign
distribution arrangements; the factors we believe to be driving
demand for our tests and our ability to sustain or increase such demand; our success in increasing patient
and physician demand as a result of our direct sales approach; plans for enhancements of Oncotype
DX to address different patient populations of breast cancer; plans for, and the timeframe for the
development or commercial launch of, future tests addressing different patient populations or other
cancers; the factors that we believe will drive the establishment of coverage policies; the
capacity of our clinical reference laboratory to process tests and our expectations regarding
capacity; our dependence on collaborative relationships and the success of those relationships;
whether any tests will result from our collaborations; the applicability of clinical results to
actual outcomes; our estimates and assumptions with respect to disease incidence; our plans with
respect to potential tests for ductal carcinoma in situ, or other cancers or for patients treated
with aromatase inhibitors or other treatments; the occurrence, timing, outcome or success of
clinical trials or studies; our intention to plan additional development or clinical studies; our
expectations regarding the timing of announcement or publication of research results; the benefits of our
technology platform; the economic benefits of our tests to the healthcare system; the ability of our
tests to impact treatment decisions; our beliefs regarding our competitive benefits; our belief that
multi-gene analysis provides better analytical information; our expectations regarding clinical
development processes future tests may follow; our beliefs regarding the benefits of individual
gene reporting; the level of investment in our sales force; our expectations regarding our general
and administrative, sales and marketing and research and development expense levels and our
anticipated uses of those funds; our expectations regarding capital expenditures; our ability to
comply with the requirements of being a public company; our ability to attract and retain
experienced personnel; the adequacy of our product liability insurance; how we intend to spend our
existing cash and cash equivalents and how long we expect our existing cash to last; our
anticipated cash needs and our estimates regarding our capital requirements and our needs for
additional financing; our expected future sources of cash; our plans to borrow additional amounts
under existing or new financing arrangements; our expectations regarding our needs to use equipment
financing as a funding source; our belief that we are in material compliance with financial
covenants; our expectations regarding repayment of debt or incurrence of additional debt; our
compliance with federal, state and foreign regulatory requirements; the potential impact resulting
from the regulation of Oncotype DX by the U.S. Food and Drug Administration, or FDA, and our belief
that Oncotype DX is properly regulated under the Clinical Laboratory Improvement Amendments of
1988, or CLIA; the impact of new or changing policies, regulation or legislation on our business;
our belief that we have taken reasonable steps to protect our intellectual property; our strategies
regarding filing additional patent applications to strengthen our intellectual property rights; the
impact of changing interest rates; our beliefs regarding our unrecognized tax benefits; the impact
of accounting pronouncements and our critical accounting policies, judgments, estimates, models and
assumptions on our financial results; the impact of the economy on our business, patients and
payors; our expectations regarding the impact of the economic environment on our liquidity and our
investments; and anticipated trends and challenges in our business and the markets in which we
operate.
Forward-looking statements are subject to risks and uncertainties that could cause actual
results to differ materially from those expected. These risks and uncertainties include, but are
not limited to, those risks discussed in Item 1A of this report, as well as our ability to develop
and commercialize new products; the risk of unanticipated delays in research and development
efforts; the risk that we may not obtain or maintain adequate reimbursement for our existing tests and any future tests
we may develop; the risks and uncertainties associated with the regulation of our tests by FDA; the
impact of legislation on our business; our ability to compete against third parties; our ability to
obtain capital when needed; the economic environment; and our history of operating losses. These
forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation
or undertaking to update any forward-looking statements contained herein to reflect any change in
our expectations with regard thereto or any change in events, conditions or circumstances on which
any such statement is based.
In this report, all references to Genomic Health, we, us, or our mean Genomic Health,
Inc.
Genomic Health, the Genomic Health logo, Oncotype, Oncotype DX and Recurrence Score are
trademarks or registered trademarks of Genomic Health, Inc. We also refer to trademarks of other
corporations and organizations in this report.
14
Business Overview
We are a life science company focused on the global development and commercialization of
genomic-based clinical diagnostic tests for cancer that allow physicians and patients to make
individualized treatment decisions. Our Oncotype DX platform utilizes quantitative genomic analysis
in standard tumor pathology specimens to provide tumor-specific information, or the oncotype of a
tumor, In January 2004, we launched our first Oncotype DX test, which is used to predict the
likelihood of cancer recurrence and the likelihood of chemotherapy benefit in early stage breast
cancer patients. Effective June 1, 2010, the list price of our Oncotype DX breast cancer test
increased from $3,975 to $4,075. In January 2010, we launched our second Oncotype DX test, which is
used to predict the likelihood of cancer recurrence in stage II colon cancer patients. The list
price for our Oncotype DX colon cancer test is $3,200. Substantially all of our historical revenues
have been derived from the sale of Oncotype DX breast cancer tests ordered by physicians in the
U.S.
For the three and six months ended June 30, 2010, 14,050 and more than 27,360 Oncotype DX test
reports were delivered for use in treatment planning, compared to more than 11,880 and 23,100 test
reports delivered for the three and six months ended June 30, 2009. More than 25% of our test
volume for the three months ended June 30, 2010 was from markets other than the U.S. node-negative,
or N-, breast cancer market, including U.S. patients with node positive, or N+, breast cancer
disease, international breast cancer patients, and colon cancer patients. All of our tests are
conducted at our clinical reference laboratory in Redwood City, California. Our clinical reference
laboratory processing capacity is currently approximately 17,000 tests per calendar quarter. As
test processing for our Oncotype DX breast and colon cancer tests is essentially the same, except
that the tests use different RNA extraction methods and analyze different genes, we believe that we
currently have sufficient capacity to process both of our tests.
Oncotype DX Breast Cancer Test
We believe increased demand for our Oncotype DX breast cancer test resulted from our ongoing
commercial efforts, continued publication of peer-reviewed articles on studies we sponsored,
conducted or collaborated on that support the use of and reimbursement for the test, clinical
presentations at major symposia, and the inclusion of our breast cancer test in clinical practice
guidelines. However, this increased demand is not necessarily indicative of future growth rates,
and we cannot assure you that this level of increased demand can be sustained or that publication
of articles, future appearances or presentations at medical conferences or increased commercial
efforts will have a similar impact on demand for our breast cancer test in the future. We have in
the past, and may in the future, experience slower sequential growth in demand for our test in the
second and third calendar quarters, which we believe may be attributed to physicians, surgeons and
patients scheduling vacations during this time. Sequential quarterly demand for our breast cancer
test may also be impacted by other factors, including the economic environment and continued high
unemployment levels, our shift in commercial focus to our Oncotype DX colon cancer test or any
future products we may develop, and the number of clinical trials in process by cooperative groups
or makers of other tests conducting experience studies.
We depend upon third-party payors to provide reimbursement for our test. Accordingly, we have
focused substantial resources on obtaining reimbursement coverage from third-party payors. Many
large national and regional third-party payors, along with the local Medicare carrier for
California with jurisdiction for claims submitted by us for Medicare patients, have issued positive
coverage determinations for our Oncotype DX breast cancer test for patients with N-, estrogen
receptor positive, or ER+, disease through contracts, agreements or policy decisions.
In June 2009, the local carrier with jurisdiction for claims submitted by us for Medicare
patients extended its coverage for our breast cancer test to include ER+ patients with N+ disease
(up to three positive lymph nodes). Additionally, some payors provide policy coverage for the use
of our test in patients with lymph node micro-metastasis (greater than 0.2 mm, but not greater than
2.0 mm in size). However, we may not be able to obtain reimbursement coverage from other payors for
our test for breast cancer patients with N+, ER+ disease.
In January 2010, we hired 8 U.S. sales representatives, increasing our domestic sales force to
a total of 88 sales representatives. We have also continued to expand internationally. As of June
30, 2010, we had exclusive distribution agreements for our Oncotype DX breast cancer test with
distributors in 13 countries outside of the U.S., and more than 27 million lives outside of the
U.S. were covered through reimbursement arrangements with a variety of public and private payors.
We have completed or initiated multiple international clinical studies intended to support the
adoption of our breast cancer test outside of the U.S. While we plan to use essentially the same
business model as we use in the U.S., there are significant differences between countries that need
to be considered. For example, different countries may have a public healthcare system, a
combination of public and private healthcare
15
systems or a cash-based payment system. We may decide to work directly on our own in certain
countries while continuing to utilize distribution agreements in other countries. Although we have
continued to expand our sales, marketing and reimbursement efforts outside the U.S., we do not
expect international product revenues to comprise more than 10% of our total revenues for at least
the next year or more.
Oncotype DX Colon Cancer Test
We expect to focus substantial resources on obtaining adoption of and reimbursement for our
Oncotype DX colon cancer test, which we launched in January 2010. We believe the key factors that
will drive adoption of this test include our continued publication of peer-reviewed articles on
studies we sponsored, conducted or collaborated on that support the use of and reimbursement for
the test, clinical presentations at major symposia and our ongoing commercial efforts. We are
working with public and private payors and health plans to secure coverage for our colon cancer
test based upon clinical evidence showing the utility of the test. We may need to hire additional
scientific, technical and other personnel to support this process.
In
July 2010, we obtained our first reimbursement coverage for our Oncotype DX colon cancer
test. Clalit Health Care, the largest government payor in Israel, established a reimbursement
coverage policy for our colon cancer test, which is currently offered for sale in Israel under a
distribution agreement with a third party.
We have obtained only limited reimbursement coverage from third-party payors for our Oncotype
DX colon cancer test. As a new test, our colon cancer test may be considered investigational by
payors and therefore may not be covered under their reimbursement policies. Consequently, we intend
to pursue case-by-case reimbursement and expect that the test will continue to be reviewed on this
basis until policy decisions have been made by individual payors. We believe it may take several
years to achieve reimbursement with a majority of third-party payors. However, we cannot predict
whether, or under what circumstances, payors will reimburse for our test. Based upon our experience
in obtaining adoption of and reimbursement for our Oncotype DX breast cancer test, we do not expect
product revenues from our colon cancer test to comprise more than 10% of our total revenues for at
least the next year or more.
During the second quarter of 2010, we began collecting samples for our second stage II colon
cancer recurrence study. In June 2010, the first treatment decision impact study of our colon
cancer test was initiated. We are planning additional studies to support the clinical utility and
assess the treatment impact and health economic benefit of our colon cancer test.
Product Pipeline
We are investigating the utility of Oncotype DX in patients with ductal carcinoma in situ, or
DCIS, which generally refers to a pre-invasive tumor with reduced risk of recurrence. In early
2010, we presented positive results from a DCIS breast cancer feasibility study demonstrating that
ribonucleic acid, or RNA, extraction and reverse transcription polymerase chain reaction reaction,
or RT-PCR, technology can be successfully performed to assess gene expression profiles from fixed
paraffin-embedded, or FPE, tissues. We plan to evaluate the use of the Oncotype DX 21-gene breast
cancer panel and also seek to identify other genes that may be used for treatment planning in DCIS.
We are working with collaborators to collect tissue samples for DCIS validation and gene discovery
studies.
In June 2010, we presented positive results from an evaluation of biological similarities and
differences between stage II and stage III colon cancer suggesting the Oncotype DX colon cancer
Recurrence Score may also predict recurrence risk in stage III colon cancer. We plan to continue
conducting early development tests to evaluate our colon cancer test for treatment planning in
stage III disease, and we are also conducting studies to investigate our colon cancer tests
ability to predict chemotherapy benefit in stage II and stage III colon cancer patients treated
with oxaliplatin.
In June 2010, we presented results from our first renal gene identification study under our
collaboration agreement with Pfizer Inc. for the development of a genomic test to estimate the risk
of recurrence following surgery for patients with stage I-III renal carcinoma, clear cell type,
that has not spread to other parts of the body. The study results demonstrated a strong correlation
between gene expression and recurrence risk in this patient population. During the second quarter
of 2010, we also completed our first prostate gene identification study and we expect to report
those results in late 2010.
16
Economic Environment
Continuing concerns over prolonged high unemployment levels, the availability and cost of
credit, the U.S. mortgage market, the U.S. real estate market, Federal budget proposals, inflation,
deflation, energy costs and geopolitical issues have contributed to increased volatility and
diminished expectations for the global economy and expectations of slower global economic growth
going forward. These factors, combined with declines in business and consumer confidence and a
volatile stock market, have precipitated an economic slowdown and recession. We periodically
evaluate the impact of this environment on our cash management, cash collection activities and
volume of tests delivered.
As of the date of this report, we have not experienced a loss of principal on any of our
investments, and we expect that we will continue to be able to access or liquidate these
investments as needed to support our business activities. From time to time, we monitor the
financial position of our significant third-party payors, which include Medicare and managed care
companies. As of the date of this report, we do not expect the current economic environment to have
a material negative impact on our ability to collect payments from third-party payors in the
foreseeable future. The economic slowdown continued to have a negative impact on sequential
quarterly growth in tests delivered during the three months ended June 30, 2010, compared with the
three months ended March 31, 2010, particularly in areas of the U.S. with high unemployment levels
where patients have lost healthcare coverage, delayed medical checkups or are unable to pay for our
tests. We intend to continue to assess the impact of the economic environment on our business
activities. If the economic climate in the U.S. does not improve or continues to deteriorate, the
volume of tests delivered could continue to be negatively impacted and we could experience lower
revenues.
U.S. Healthcare Legislation
The recently enacted Patient Protection and Affordable Care Act, as amended by the Health Care
and Education Affordability Reconciliation Act, or, collectively, the PPACA, makes changes that are
expected to significantly impact the pharmaceutical and medical device industries. The PPACA
contains a number of provisions designed to generate the revenues necessary to fund expanded health
insurance coverage, including new fees or taxes on certain health-related industries, including
medical device manufacturers. Beginning in 2013, each medical device manufacturer will have to pay
sales tax in an amount equal to 2.3% of the price for which such manufacturer sells its
medical devices. Though there are some exceptions to the tax, it may apply to some or all of our
current products and products in development if they are classified in the future as in vitro
diagnostic multivariate index assays by FDA. The PPACA also mandates a reduction in payments for
clinical laboratory services paid under the Medicare Clinical Laboratory Fee Schedule, in addition
to a productivity adjustment to the Clinical Laboratory Fee Schedule. In addition, the PPACA
establishes a board that is charged with reducing the per capita rate of growth in Medicare
spending. These reductions in payments may apply to some or all of our clinical laboratory tests
delivered to Medicare beneficiaries.
We are monitoring the impact of the PPACA in order to enable us to determine the trends and
changes that may be necessitated by the legislation that may potentially impact on our business
over time.
Critical Accounting Policies and Significant Judgments and Estimates
There have been no material changes in our critical accounting policies, estimates and
judgments during the three months ended June 30, 2010 compared to the disclosures in Part II,
Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2009.
Results of Operations
Three and Six Months Ended June 30, 2010 and 2009
We recorded net income of $865,000 for the three months ended June 30, 2010 and a net loss of
$1.1 million for the six months ended June 30, 2010 compared to a net loss for the three and six
months ended June 30, 2009 of $3.9 million and $8.6 million, respectively. On a basic and diluted
per share basis, net income was $0.03 for the three months ended June 30, 2010 and net loss was
$0.04 for the six months ended June 30, 2010 compared to a net loss of $0.14 and $0.30 for the
three and six months ended June 30, 2009, respectively. We may incur net losses in future periods
due to future spending, and we do not expect to achieve sustained profitability for at least the
next year or more.
17
Revenues
Total revenues increased 19% to $43.4 million and 20% to $84.7 million for the three and six
months ended June 30, 2010, respectively, compared to $36.6 million and $70.4 million for the three
and six months ended June 30, 2009. We derive our revenues primarily from product sales and, to a
lesser extent, from contract research arrangements. We operate in one industry segment. As of June
30, 2010, substantially all of our product revenues have been derived solely from the sale of our
Oncotype DX breast cancer test. Payors are billed upon generation and delivery of a Recurrence
Score report to the physician. Product revenues are recorded on a cash basis unless a contract or
arrangement is in place with the payor at the time of billing and collectibility is reasonably
assured. Contract revenues are derived from studies conducted with biopharmaceutical and
pharmaceutical companies and are recorded as contractual obligations are completed.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Product revenues |
|
$ |
42,514 |
|
|
$ |
35,191 |
|
|
$ |
82,779 |
|
|
$ |
68,618 |
|
Contract revenues |
|
|
925 |
|
|
|
1,361 |
|
|
|
1,888 |
|
|
|
1,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
43,439 |
|
|
$ |
36,552 |
|
|
$ |
84,667 |
|
|
$ |
70,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter over quarter dollar increase in product revenues |
|
$ |
6,887 |
|
|
|
|
|
|
$ |
14,219 |
|
|
|
|
|
Quarter over quarter percentage increase in product revenues |
|
|
19 |
% |
|
|
|
|
|
|
20 |
% |
|
|
|
|
The increase in product revenues for both the three and six month comparative periods resulted
from an increase in test volume, expanded reimbursement coverage, an increase in the amount of
revenue recognized per test, and an increase in revenues recorded on an accrual basis.
Approximately 53% of product revenues for the three and six months ended June 30, 2010 were
recorded on an accrual basis and recognized at the time the test results were delivered, compared
to approximately 50% of product revenues for the three and six months ended June 30, 2009. For both
periods, the balance of product revenues was recognized upon cash collection as payments were
received. During the six months ended June 30, 2010, we received payments from two third-party
payors that were delayed as of December 31, 2009. The delays resulted from interruptions in
payments due to contract and documentation requirements, which have since been resolved. These
payments were recognized as product revenues when received. The timing of recognition of revenues
related to these and other third-party payments may cause fluctuations in product revenues from
period to period.
Product revenues on behalf of Medicare patients were $8.4 million, or 20%, and $16.7 million,
or 20%, of product revenues for the three and six months ended June 30, 2010, respectively, compared
to $6.4 million, or 18%, and $13.0 million, or 19% of product revenues for the three and six months
ended June 30, 2009, respectively. There were no other third party payors with product revenues of
10% or more for these periods. International product revenues were $2.2 million, or 5%, and $4.0
million, or 5%, of total product revenues for the three and six months ended June 30, 2010, respectively, compared
to $1.4 million, or 4%, and 2.7% million, or 4%, of total product revenues for the three and six
months ended June 30, 2009, respectively.
Contract revenues were $0.9 million and $1.9 million for the three and six months ended June
30, 2010, respectively, compared to $1.4 million and $1.8 million for the three and six months
ended June 30, 2009, respectively. The period over period variances in contract revenues were due to project
timing for ongoing contract research and development activities. We expect that our contract
revenues will continue to fluctuate based on the timing and number of studies being conducted.
Cost of Product Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
|
(In thousands) |
|
Tissue sample processing costs |
|
$ |
5,930 |
|
|
$ |
5,381 |
|
|
$ |
11,883 |
|
|
$ |
10,808 |
|
Stock-based compensation |
|
|
96 |
|
|
|
88 |
|
|
|
189 |
|
|
|
181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tissue sample processing costs |
|
|
6,026 |
|
|
|
5,469 |
|
|
|
12,072 |
|
|
|
10,989 |
|
License fees |
|
|
2,081 |
|
|
|
2,422 |
|
|
|
5,001 |
|
|
|
4,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of product revenues |
|
$ |
8,107 |
|
|
$ |
7,891 |
|
|
$ |
17,073 |
|
|
$ |
15,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter over quarter dollar increase |
|
$ |
216 |
|
|
|
|
|
|
$ |
1,354 |
|
|
|
|
|
Quarter over quarter percentage increase |
|
|
3 |
% |
|
|
|
|
|
|
9 |
% |
|
|
|
|
18
Cost of product revenues represents the cost of materials, direct labor, equipment and
infrastructure expenses associated with processing tissue samples (including histopathology,
anatomical pathology, paraffin extraction, RT-PCR, quality control analyses and shipping charges to
transport tissue samples) and license fees. Infrastructure expenses include allocated facility
occupancy and information technology costs. Costs associated with performing our test are recorded
as tests are processed. Costs recorded for tissue sample processing represent the cost of all the
tests processed during the period regardless of whether revenue was recognized with respect to that
test. Royalties for licensed technology calculated as a percentage of product revenues and fixed
annual payments relating to the launch and commercialization of Oncotype DX tests are recorded as
license fees in cost of product revenues at the time product revenues are recognized or in
accordance with other contractual obligations. While license fees are generally calculated as a
percentage of product revenues, the percentage increase in license fees does not correlate exactly
to the percentage increase in product revenues because certain agreements contain provisions for
fixed annual payments and other agreements have tiered rates and payments that may be subject to
annual minimum or maximum amounts. License fees represent a significant component of our cost of
product revenues and are expected to remain so for the foreseeable future.
Tissue sample processing costs increased $549,000, or 10%, for the three months ended June 30,
2010 compared to the three months ended June 30, 2009. Tissue sample processing costs increased
$1.1 million, or 10%, for the six months ended June 30, 2010 compared to the six months ended June
30, 2009. These increases reflected were driven primarily by an 18% increase in test volume for
both the three and six month comparative periods, partially offset by cost controls and efficiency
gains. License fees decreased $341,000, or 14%, for the three months ended June 30, 2010 compared
to the three months ended June 30, 2009. License fees increased $271,000, or 6%, for the six months
ended June 30, 2010 compared to the six month ended June 30, 2009. License fees for the three and
six months ended June 30, 2010 included a decrease of approximately $825,000 related to the
discontinuance of certain license fees resulting from the abandonment of a patent by the licensor.
The $825,000 decrease, which represented 1% of total product revenues, consisted of a $425,000
decrease for the three months ended June 30, 2010 and a $400,000 decrease for the three months
ended March 31, 2010. This decrease was offset by increases in
license fees (related to other licenses) due to increased
product revenues of $434,000 and $846,000 for the three and six months ended June 30, 2010,
respectively, and expense related to fixed annual payments to one of our collaborators triggered by
the January 2010 launch of our Oncotype DX colon cancer test of $50,000 and $250,000 for the three
and six months ended June 30, 2010, respectively. We expect the cost of product revenues to
increase in future periods to the extent we process more tests.
Research and Development Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Personnel-related expenses |
|
$ |
3,965 |
|
|
$ |
4,550 |
|
|
$ |
8,058 |
|
|
$ |
9,258 |
|
Stock-based compensation |
|
|
759 |
|
|
|
770 |
|
|
|
1,466 |
|
|
|
1,540 |
|
Reagents and laboratory supplies |
|
|
611 |
|
|
|
845 |
|
|
|
984 |
|
|
|
1,276 |
|
Collaboration expenses |
|
|
567 |
|
|
|
891 |
|
|
|
1,163 |
|
|
|
1,495 |
|
Infrastructure and all other costs |
|
|
2,078 |
|
|
|
2,187 |
|
|
|
4,102 |
|
|
|
4,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total research and development expenses |
|
$ |
7,980 |
|
|
$ |
9,243 |
|
|
$ |
15,773 |
|
|
$ |
17,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter over quarter dollar decrease |
|
$ |
(1,263 |
) |
|
|
|
|
|
$ |
(2,115 |
) |
|
|
|
|
Quarter over quarter percentage decrease |
|
|
(14 |
%) |
|
|
|
|
|
|
(12 |
%) |
|
|
|
|
Research and development expenses represent costs incurred to develop our technology and carry
out clinical studies and include personnel-related expenses, reagents and supplies used in research
and development laboratory work, infrastructure expenses, including allocated facility occupancy
and information technology costs, contract services and other outside costs. Research and
development expenses also include costs related to activities performed under contracts with
biopharmaceutical and pharmaceutical companies.
The $1.3 million, or 14%, decrease in research and development expenses for the three months
ended June 30, 2010 compared to the three months ended June 30, 2009 included a $585,000 decrease
in personnel-related expenses, a $324,000 decrease in collaboration expenses, a $234,000 decrease
in reagents and laboratory supplies and a $109,000 decrease in infrastructure and other
19
costs. The $2.1 million, or 12%, decrease in research and development expenses for the six
months ended June 30, 2010 compared to the six months ended June 30, 2009 reflected a $1.2 million
decrease in personnel-related expenses, a $496,000 decrease in collaboration expenses, a $292,000
decrease in reagents and laboratory supplies and a $217,000 decrease in infrastructure and all
other costs. These decreases were due primarily to cost controls, efficiency gains, project timing
for ongoing contract research and development activities, and the movement of our Oncotype DX colon
cancer test from development in the first half of 2009 to commercialization in the last half of
2009 and product launch in January 2010. We expect our research and development expenses to
increase in future periods due to the initiation of additional studies related to our colon test
and increased investment in our product pipeline for breast, colon, renal, prostate and other
cancers.
Selling and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Personnel-related expenses |
|
$ |
8,464 |
|
|
$ |
7,417 |
|
|
$ |
17,359 |
|
|
$ |
14,689 |
|
Stock-based compensation |
|
|
831 |
|
|
|
798 |
|
|
|
1,644 |
|
|
|
1,595 |
|
Promotional and marketing materials |
|
|
3,510 |
|
|
|
3,439 |
|
|
|
7,056 |
|
|
|
5,949 |
|
Travel, meetings and seminars |
|
|
1,934 |
|
|
|
1,927 |
|
|
|
4,112 |
|
|
|
3,985 |
|
Infrastructure and all other costs |
|
|
2,778 |
|
|
|
2,128 |
|
|
|
5,361 |
|
|
|
4,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales and marketing expenses |
|
$ |
17,517 |
|
|
$ |
15,709 |
|
|
$ |
35,532 |
|
|
$ |
30,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter over quarter dollar increase |
|
$ |
1,808 |
|
|
|
|
|
|
$ |
5,126 |
|
|
|
|
|
Quarter over quarter percentage increase |
|
|
12 |
% |
|
|
|
|
|
|
17 |
% |
|
|
|
|
Our selling and marketing expenses consist primarily of personnel-related expenses, education
and promotional expenses, and infrastructure expenses, including allocated facility occupancy and
information technology costs. These expenses include the costs of educating physicians, laboratory
personnel and other healthcare professionals regarding our genomic technologies, how our Oncotype
DX tests are developed and validated and the value of the quantitative information that our tests
provide. Selling and marketing expenses also include the costs of sponsoring continuing medical
education, medical meeting participation and dissemination of scientific and economic publications
related to our Oncotype DX platform. Our sales force compensation includes annual salaries and
eligibility for quarterly commissions based on the achievement of predetermined sales goals.
The $1.8 million, or 12%, increase in selling and marketing expenses for the three months
ended June 30, 2010 compared to the three months ended June 30, 2009 was due primarily to a $1.1
million increase in personnel-related expenses and a $650,000 increase in infrastructure and other
costs, including allocations for information technology, recruiting and other expenses. The $5.1
million, or 17%, increase in selling and marketing expenses for the six months ended June 30, 2010
compared to the six months ended June 30, 2009 was due to a $2.7 million increase in
personnel-related expenses, a $1.1 million increase in promotional field and marketing expenses,
including materials related to our colon cancer product launch and international expansion, and a
$1.2 million increase in infrastructure and other costs. The increase in personnel-related expenses
for both the three and six month comparative periods reflected the addition of eight domestic field
sales representatives in January 2010 and higher consulting and other expenses related to our
international expansion efforts, We expect selling and marketing expenses to increase in future
periods due to our efforts to establish adoption of and reimbursement for our Oncotype DX colon
cancer test and the expansion of our commercial efforts in international markets.
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Personnel-related expenses |
|
$ |
5,304 |
|
|
$ |
4,811 |
|
|
$ |
10,527 |
|
|
$ |
9,616 |
|
Stock-based compensation |
|
|
1,092 |
|
|
|
880 |
|
|
|
2,092 |
|
|
|
1,740 |
|
Professional fees and all other costs |
|
|
2,356 |
|
|
|
1,960 |
|
|
|
4,460 |
|
|
|
3,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expenses |
|
$ |
8,752 |
|
|
$ |
7,651 |
|
|
$ |
17,079 |
|
|
$ |
14,989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter over quarter dollar increase |
|
$ |
1,101 |
|
|
|
|
|
|
$ |
2,090 |
|
|
|
|
|
Quarter over quarter percentage increase |
|
|
14 |
% |
|
|
|
|
|
|
14 |
% |
|
|
|
|
20
Our general and administrative expenses consist primarily of personnel-related expenses and
professional fees and other costs, including intellectual property defense and prosecution costs,
billing and collection costs, bad debt expense and other professional and administrative costs and
related infrastructure expenses, including allocated facility occupancy and information technology
costs.
The $1.1 million, or 14%, increase in general and administrative expenses for the three months
ended June 30, 2010 compared to the three months ended June 30, 2009 was due primarily to a
$493,000 increase in personnel-related expenses, a $256,000 increase in billing and collection fees
related to increases in the number of tests processed and cash collections, a $237,000 increase in
bad debt expense related to growth in our aged accounts receivable balance and a $212,000 increase
in stock-based compensation expense, partially offset by a $93,000 decrease in outside legal fees.
The $2.1 million, or 14%, increase in general and administrative expenses for the six months ended
June 30, 2010 compared to the six months ended June 30, 2009 was due primarily to a $911,000
increase in personnel-related expenses, a $571,000 increase in bad debt expense, a $493,000
increase in billing and collection fees and a $352,000 increase in stock-based compensation
expense, partially offset by a $252,000 decrease in outside legal fees. The increase in
personnel-related expenses for both the three and six month comparative periods reflected the
addition of in-house legal staff. We expect general and administrative expenses to increase in
future periods as we hire additional staff and incur other expenses to support the growth of our
business and to the extent we spend more on fees for billing and collections as we process more
tests.
Interest and Other Income
Interest and other income was $57,000 and $165,000 for the three and six months ended June 30,
2010, respectively, compared to $213,000 and $462,000 for the three and six months ended June 30,
2009, respectively. The $156,000 and $297,000 decreases for the three and six month comparative
periods were primarily due to lower market yields on our investment portfolio. We expect our
interest income will remain nominal through 2010 as we expect the current low interest rate
environment to continue.
Interest and Other Expense
Interest and other expense was $24,000 and $45,000 for the three and six months ended June 30,
2010, respectively, compared to $34,000 and $86,000 for the three and six months ended June 30, 2009, respectively. The $10,000
and $41,000 decreases for the three and six months ended comparative periods were due primarily to
lower interest expense due to lower average balances on our equipment financing notes as we paid
them down, partially offset by net realized foreign exchange transaction losses. We expect our
interest expense to decline as we continue to make payments on the notes, which are scheduled to be
paid in full by November 2010. We do not anticipate using additional equipment financing as a
funding source in the next twelve months.
Income Tax Expense
For the three and six months ended June 30, 2010, we recorded income tax expense of $251,000
and $396,000, respectively, which was principally comprised of California alternative minimum tax,
other state income taxes and foreign taxes computed using the discrete, or cut-off, method.
Income tax expense of $180,000 and $390,000 was recorded for the three and six months ended June
30, 2009, respectively, which was principally comprised of California state income tax, federal
alternative minimum tax and foreign taxes, and was based on our estimated taxable income for the
year ended December 31, 2009. The change in tax computation method for the six months ended June
30, 2010 was made prospectively and was due to the impact of expected quarterly earnings volatility
on the our ability to reliably forecast an effective tax rate for 2010.
As a result of cumulative losses since inception and based on all available evidence, we
continue to believe that there is substantial uncertainty as to whether we will recover recorded
net deferred taxes in future periods. Accordingly, we continue to maintain a full valuation
allowance on our net deferred tax assets until sufficient evidence exists to support the reversal
of all or some portion of this allowance.
Liquidity and Capital Resources
As of June 30, 2010, we had an accumulated deficit of $179.0 million. We may incur net losses
in the future and we cannot provide assurance as to when, if ever, we will achieve sustained
profitability. We expect that our research and development, selling and marketing and general and
administrative expenses will increase in future periods and, as a result, we will need to continue
to generate significant product revenues to achieve sustained profitability.
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
$ Change |
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
As of June 30: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments |
|
$ |
61,888 |
|
|
$ |
55,729 |
|
|
|
6,159 |
|
Working capital |
|
|
61,937 |
|
|
|
50,193 |
|
|
|
11,744 |
|
For the six months ended June 30: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
|
5,961 |
|
|
|
1,062 |
|
|
|
4,899 |
|
Investing activities |
|
|
(683 |
) |
|
|
(431 |
) |
|
|
(252 |
) |
Financing activities |
|
|
814 |
|
|
|
(436 |
) |
|
|
1,250 |
|
Capital expenditures (included in investing activities above) |
|
|
(2,329 |
) |
|
|
(1,412 |
) |
|
|
(917 |
) |
Sources of Liquidity
At June 30, 2010, we had cash, cash equivalents and short-term investments of $61.9 million
compared to $55.7 million at June 30, 2009. The $6.2 million increase was attributable to increased
cash collections from sales of our tests and payments from collaborators, which were partially
offset by investments in the growth of our business, including our international expansion and
activities related to our colon cancer product launch in January 2010. In accordance with our
investment policy, available cash is invested in short-term, low-risk, investment-grade debt
instruments. Our cash and short-term investments are held in a variety of interest-bearing
instruments including money market accounts, U.S. Treasury securities, debt obligations of U.S.
government-sponsored entities, high-grade corporate bonds and commercial paper. At June 30, 2010,
our holdings of debt obligations of U.S. government-sponsored entities consisted entirely of debt
securities issued by the Federal Home Loan Bank, the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation.
Historically, we have financed our operations primarily through sales of our equity securities
and cash received in payment for our tests. Purchases of equipment and leasehold improvements have
been partially financed through capital equipment financing arrangements. At June 30, 2010 and
2009, we had notes payable under these equipment financing arrangements of $105,000 and $940,000,
respectively. Our existing notes payable under these arrangements are scheduled to be fully paid by
November 2010.
Cash Flows
We achieved positive net cash flows for both the six months ended June 30, 2010 and the six
months ended June 30, 2009. Net cash provided by operating activities was $6.0 million for the six
months ended June 30, 2010 compared to net cash provided by operating activities of $1.1 million
for the six months ended June 30, 2009. Net cash provided by operating activities includes net loss
adjusted for certain non-cash items and changes in assets and liabilities. Net cash provided by
operating activities for the six months ended June 30, 2010 reflected a net loss of $1.1 million,
adjusted for $8.9 million of stock-based compensation and depreciation and amortization expense,
and a $1.9 million increase in accounts payable, partially offset by a $1.2 million increase in
accounts receivable, a $1.4 million decrease in accrued compensation expense, a $518,000 decrease
in accrued license fees, a $366,000 decrease in accrued expenses and
other liabilities and a
$288,000 increase in prepaid expenses and other assets. Net cash provided by operating activities
for the six months ended June 30, 2009 reflected a $1.8 million increase in accrued compensation
expense, a $633,000 increase in
accounts payable and a $535,000 increase in accrued expenses and other
liabilities, partially offset by a $1.8 million increase in deferred revenues reflecting the
recognition of collaboration contract revenues.
Net cash used in investing activities was $683,000 for the six months ended June 30, 2010,
compared to net cash used in investing activities of $431,000 for the six months ended June 30,
2010. Our investing activities have consisted predominately of purchases and maturities of
marketable securities and capital expenditures. Net cash used in investing activities for the six
months ended June 30, 2010 included $2.3 million in capital expenditures, partially offset by $1.6
million in net maturities of marketable securities. Net cash used in investing activities for the
six months ended June 30, 2009 included $1.4 million in capital expenditures, partially offset by
$1.0 million in net maturities of short-term investments.
Net cash provided by financing activities was $814,000 for the six months ended June 30, 2010,
compared to net cash used in financing activities of $436,000 for the six months ended June 30,
2009. Our financing activities included sales of our equity securities and payments on our capital
equipment financing arrangements. Net cash provided by financing activities for the six months
ended June 30, 2010 included $934,000 in proceeds from the issuance of our common stock upon the
exercise of employee stock options, partially offset by $120,000 in principal payments on our debt.
Net cash used in financing activities for the six months ended June 30,
2009 included $1.1 million in principal payments on our debt, partially offset by $663,000 in
proceeds from the issuance of our common stock upon the exercise of employee stock options.
22
Contractual Obligations
The following table summarizes our significant contractual obligations as of June 30, 2010 and
the effect those obligations are expected to have on our liquidity and cash flows in future
periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
than |
|
|
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
Non-cancelable operating lease obligations |
|
$ |
8,090 |
|
|
$ |
2,302 |
|
|
$ |
2,457 |
|
|
$ |
1,371 |
|
|
$ |
1,960 |
|
Notes payable obligations |
|
|
108 |
|
|
|
108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,198 |
|
|
$ |
2,410 |
|
|
$ |
2,457 |
|
|
$ |
1,371 |
|
|
$ |
1,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our non-cancelable operating lease obligations are for laboratory and office space. In
September 2005, we entered into a non-cancelable lease for 48,000 square feet of laboratory and
office space in Redwood City, California. In January 2007, we entered into a non-cancelable lease
for 48,000 square feet of additional office space in a nearby location. Both leases expire in
February 2012. In October 2009, we entered into a non-cancelable agreement to lease an additional
30,500 square feet of office space near our current locations, which expires in March 2018. In May
2010, our wholly-owned European subsidiary entered into a non-cancelable lease for approximately
2,500 square feet of office space in Geneva, Switzerland, which expires in June 2015.
Our notes payable obligations are for principal and interest payments on capital equipment
financing. In March 2005, we entered into an arrangement to finance the acquisition of laboratory
equipment, computer hardware and software, leasehold improvements and office equipment. In
connection with this arrangement, we granted the lender a security interest in the assets purchased
with these borrowings. We may prepay all, but not part, of the amounts owing under the arrangement
so long as we also pay a 4% premium on the remaining payments. As of June 30, 2010, the outstanding
notes payable principal balance under this arrangement totaled $105,000 at an annual interest rate
of 11.30%.
We are required to make a series of annual payments under one of our collaboration agreements
beginning on the date that we commercially launched our Oncotype DX breast cancer test. At June 30,
2010, the future annual payment due under this agreement was $475,000, which is due in 2011. We
were also required to make a series of fixed annual payments under a separate collaboration
agreement beginning with the January 2010 launch of our Oncotype DX colon cancer test. At June 30,
2010, future annual payments due under this agreement were $200,000 in 2011, $300,000 in 2012 and
$450,000 in each of 2013, 2014 and 2015. However, because either party may terminate the agreement
upon thirty days prior written notice, these payments are not included in the table above.
We have also committed to make potential future payments to third parties as part of our
collaboration agreements. Payments under these agreements generally become due and payable only
upon achievement of specific project milestones. Because the achievement of these milestones is
generally neither probable nor reasonably estimable, such commitments have not been included in the
table above.
Operating Capital and Capital Expenditure Requirements
We achieved positive operating cash flow for the year ended December 31, 2009 and the six
months ended June 30, 2010. We currently anticipate that our cash, cash equivalents and short-term
investments, together with collections from our Oncotype DX breast cancer test, will be sufficient
to fund our operations and facilities expansion plans for at least the next 12 months, including
the expansion of our research and development programs, establishment of adoption of and
reimbursement for our Oncotype DX colon cancer test, and our international expansion efforts. We
expect to spend approximately $5.0 million over the next twelve months for planned laboratory
equipment, facilities expansion plans and other expenditures to support the growth of our business.
We may also use cash to acquire or invest in complementary businesses, technologies, services or
products. We expect that our cash, cash equivalents and short-term investments will also be used to
fund working capital and for other general corporate purposes, such as licensing technology rights,
partnering arrangements for our tests outside of the U.S., establishing direct sales capabilities
outside of the U.S., or reduction of debt obligations.
23
The amount and timing of actual expenditures may vary significantly depending upon a number of
factors, such as the amount of cash provided by our operations, the progress of our
commercialization efforts, product development, regulatory requirements, progress in reimbursement
for our tests and available strategic opportunities for acquisition of or investment in
complementary businesses, technologies, services or products.
We cannot be certain that our international expansion, efforts to establish adoption of and
reimbursement for our Oncotype DX colon cancer test or the development of future products will be
successful or that we will be able to raise sufficient additional funds to see these programs
through to a successful result. It may take years to move any one of a number of product candidates
in research through development and validation to commercialization.
Our future funding requirements will depend on many factors, including the following:
|
|
|
the rate of progress in establishing reimbursement arrangements with domestic and
international third-party payors; |
|
|
|
|
the cost of expanding our commercial and laboratory operations, including our selling and
marketing efforts; |
|
|
|
|
the rate of progress and cost of research and development activities associated with
expansion of our Oncotype DX breast and colon cancer tests; |
|
|
|
|
the rate of progress and cost of selling and marketing activities associated with
establishing adoption of and reimbursement for our Oncotype DX colon cancer test; |
|
|
|
|
the rate of progress and cost of research and development activities associated with
products in research and early development focused on cancers other than breast and colon
cancer; |
|
|
|
|
the cost of acquiring or achieving access to tissue samples and technologies; |
|
|
|
|
the cost of filing, prosecuting, defending and enforcing any patent claims and other
intellectual property rights; |
|
|
|
|
the effect of competing technological and market developments; |
|
|
|
|
costs related to international expansion; |
|
|
|
|
the cost and delays in product development as a result of any changes in regulatory
oversight applicable to our products or operations; and |
|
|
|
|
the economic and other terms and timing of any collaborations, licensing or other
arrangements into which we may enter or acquisitions we may seek to effect. |
If we are not able to generate sustained product revenues to finance our cash requirements, we
will need to finance future cash needs primarily through public or private equity offerings, debt
financings, borrowings or strategic collaborations or licensing arrangements. At June 30, 2010,
10,000,000 shares of our common stock were available for future issuance under a shelf registration
statement. If we raise funds by issuing equity securities, dilution to stockholders may
result. Any equity securities issued also may provide for rights, preferences or privileges senior
to those of holders of our common stock. If we raise funds by issuing debt securities, these debt
securities would have rights, preferences and privileges senior to those of holders of our common
stock. The terms of debt securities or borrowings could impose significant restrictions on our
operations. If we raise funds through collaborations and licensing arrangements, we might be
required to relinquish significant rights to our technologies or products, or grant licenses on
terms that are not favorable to us. The credit market and financial services industry have been
experiencing a period of unprecedented turmoil and upheaval characterized by the bankruptcy,
failure, collapse or sale of various financial institutions and an unprecedented level of
intervention from the U.S. federal government. These events have generally made equity and debt
financing more difficult to obtain. Accordingly, additional equity or debt financing may not be
available on reasonable terms, if at all. If we are not able to secure additional funding when
needed, we may have to delay, reduce the scope of or eliminate one or more research and development
programs or selling and marketing initiatives. In addition, we may have to work with a partner on
one or more of our product or market development programs, which could lower the economic value of
those programs to us.
24
Off-Balance Sheet Arrangements
As of June 30, 2010, we had no material off-balance sheet arrangements.
Recent Accounting Pronouncements
In April 2010, the Financial Accounting Standards Board, or FASB, issued authoritative
guidance for applying the milestone method of revenue recognition to research and development
arrangements. Under this guidance, revenue contingent upon the achievement of a milestone in its
entirety may be recognized in the period in which the milestone is achieved only if the milestone
meets all the criteria within the guidance to be considered substantive. This guidance is effective
on a prospective basis for research and development milestones achieved in fiscal years, and
interim periods within those years, beginning on or after June 15, 2010. This guidance, for which
we are currently assessing the impact on our financial condition and results of operations, will
become effective for us on January 1, 2011.
In October 2009, FASB issued authoritative guidance that amends existing guidance for
identifying separate deliverables in a revenue-generating transaction where multiple deliverables
exist, and provides guidance for allocating and recognizing revenue based on those separate
deliverables. The guidance is expected to result in more multiple-deliverable arrangements being
separable than under current guidance and is required to be applied prospectively to new or
significantly modified revenue arrangements. This guidance, which we do not expect to have a
material impact on our financial condition and results of operations, will become effective for us
on January 1, 2011.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates primarily to interest earned
on our cash equivalents and marketable securities. The primary objective of our investment
activities is to preserve our capital to fund operations. We also seek to maximize income from our
investments without assuming significant risk. Our investment policy provides for investments in
short-term, low-risk, investment-grade debt instruments. Our investments in marketable securities,
which are comprised primarily of money market funds, obligations of U.S. Government agencies and
government-sponsored entities, high-grade corporate bonds and commercial paper, are subject to
default, changes in credit rating and changes in market value. Due to recent financial and economic
conditions, similar investments have experienced losses in value and liquidity constraints which
differ from historical patterns. These investments are also subject to interest rate risk and will
decrease in value if market rate interest rates increase.
Our cash, cash equivalents and marketable securities, totaling $61.9 million at June 30, 2010,
did not include any auction preferred stock, auction rate securities or mortgage-backed
investments. We currently do not hedge interest rate exposure, and we do not have any foreign
currency or other derivative financial instruments. The securities in our investment portfolio are
classified as available for sale and are, due to their short-term nature, subject to minimal
interest rate risk. To date, we have not experienced a loss of principal on any of our investments.
Although we currently expect that our ability to access or liquidate these investments as needed to
support our business activities will continue, we cannot ensure that this will not change. We
believe that, if market interest rates were to change immediately and uniformly by 10% from levels
at June 30, 2010, the impact on the fair value of these securities or our cash flows or income
would not be material.
Foreign Currency Exchange Risk
Substantially all of our revenues are recognized in U.S. dollars. Certain expenses related to
our international activities are payable in foreign currencies. As a result, our financial results
could be affected by factors such as changes in foreign currency exchange rates or weak economic
conditions in foreign markets. We recognized $35,000 in net realized foreign exchange transaction
losses for the six months ended June 30, 2010. Our total payables denominated in foreign currencies
as of June 30, 2010 were not material. The functional currency of our wholly-owned European
subsidiary is the U.S. dollar, so we are not currently subject to gains and losses from foreign
currency translation of the subsidiary financial statements. We currently do not hedge foreign
currency exchange rate exposure. Although the impact of currency fluctuations on our financial
results has been immaterial in the past, there can be no guarantee that the impact of currency
fluctuations related to our international activities will not be material in the future.
25
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and
procedures, as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934,
or Exchange Act, that are designed to ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in Securities and Exchange Commission rules and forms,
and that such information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating our disclosure controls and procedures, management
recognized that disclosure controls and procedures, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and
procedures are met. Our disclosure controls and procedures have been designed to meet reasonable
assurance standards. Additionally, in designing disclosure controls and procedures, our management
necessarily was required to apply its judgment in evaluating the cost-benefit relationship of
possible disclosure controls and procedures. The design of any disclosure controls and procedures
also is based in part upon certain assumptions about the likelihood of future events, and there can
be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions.
Based on their evaluation as of the end of the period covered by this Quarterly Report on Form
10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date,
our disclosure controls and procedures were effective at the reasonable assurance level.
(b) Changes in internal control over financial reporting. There was no change in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that
occurred during our last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
26
PART II. OTHER INFORMATION
We have a history of net losses, we may incur net losses in the future, and we may not achieve
sustained profitability.
We have incurred substantial net losses since our inception. For the six months ended June 30,
2010 and 2009, we incurred net losses of $1.1 million and $8.6 million, respectively. From our
inception in August 2000 through June 30, 2010, we had an accumulated deficit of $179.0 million. To
date, we have not achieved sustained revenues sufficient to offset expenses. We expect to devote
substantial resources to continue to invest in our product pipeline, including our current Oncotype
DX tests and future products, and our commercial and laboratory infrastructure. We may incur
additional losses in the future and we may never achieve sustained profitability.
We expect to continue to incur significant expenses to develop and market our tests, which may
make it difficult for us to achieve sustained profitability.
In recent years, we have incurred significant costs in connection with the development of our
Oncotype DX platform. For the six months ended June 30, 2010 and 2009, our research and development
expenses were $15.8 million and $17.9 million, respectively, and our sales and marketing expenses
were $35.5 million and $30.4 million, respectively. We expect our expense levels to continue to
increase for the foreseeable future as we seek to expand the clinical utility of our Oncotype DX
breast cancer test, drive adoption of and reimbursement for our Oncotype DX colon cancer test and
develop new tests. As a result, we will need to generate significant revenues in order to achieve
sustained profitability. Our failure to achieve sustained profitability in the future could cause
the market price of our common stock to decline.
Continued weak general economic or business conditions could have a negative impact on our
business.
Continuing concerns over prolonged high unemployment levels across the U.S., the availability
and cost of credit, the U.S. mortgage market, the declining U.S. real estate market, Federal budget
proposals, inflation, deflation, energy costs and geopolitical issues have contributed to increased
volatility and diminished expectations for the global economy and expectations of slower global
economic growth going forward. These factors, combined with declines in business and consumer
confidence and a volatile stock market, have precipitated an economic slowdown and recession. The
economic slowdown continued to have a negative impact on sequential quarterly growth in tests
delivered during the months ended June 30, 2010, compared with the three months ended March 31,
2010, particularly in areas of the U.S. with high unemployment levels where patients have lost
healthcare coverage, delayed medical checkups or are unable to pay for our tests. If the economic
climate does not improve or continues to deteriorate, our business, including our patient
population, our suppliers and our third-party payors, could be negatively affected, resulting in a
negative impact on our product revenues.
Healthcare policy changes, including recently enacted legislation reforming the U.S. healthcare
system, may have a material adverse effect on our financial condition and results of operations.
In March 2010, President Barack Obama signed the Patient Protection and Affordable Care Act,
as amended by the Health Care and Education Affordability Reconciliation Act, collectively, the
PPACA, which makes changes that are expected to significantly impact the pharmaceutical and medical
device industries. Beginning in 2013, each medical device manufacturer will have to pay a sales tax
in an amount equal to 2.3% of the price for which such manufacturer sells its medical
devices. Though there are some exceptions, this tax may apply to some or all of the our current
products and products in development. The PPACA also mandates a reduction in payments for clinical
laboratory services paid under the Medicare Clinical Laboratory Fee Schedule of 1.75% for the years
2011 through 2015. This adjustment is in addition to a productivity adjustment to the Clinical
Laboratory Fee Schedule. These reductions in payments may apply to some or all of our clinical
laboratory test services furnished to Medicare beneficiaries.
Other significant measures contained in the PPACA include, for example, coordination and
promotion of research on comparative clinical effectiveness of different technologies and
procedures, initiatives to revise Medicare payment methodologies, such as bundling of payments
across the continuum of care by providers and physicians, and initiatives to promote quality
indicators in payment methodologies. The PPACA also includes significant new fraud and abuse
measures, lowering the governments thresholds to find violations and increasing potential
penalties for such violations. In addition, the PPACA establishes an Independent Payment
27
Advisory Board. or IPAB, to reduce the per capita rate of growth in Medicare spending. The
IPAB has broad discretion to propose policies to reduce expenditures, which may have a negative
impact on payment rates for services, including clinical laboratory services. IPAB proposals may
impact payments for clinical laboratory services beginning in 2016 and for hospital services
beginning in 2020.
In addition to the PPACA, the effect of which cannot presently be fully quantified given its
recent enactment, various healthcare reform proposals have also emerged at the state level. In
addition, clinical laboratory tests that are developed and validated by a laboratory for its own
use are called laboratory developed tests, or LDTs. Changes in healthcare policy, such as changes
in the U.S. Food and Drug Administration, or FDA, regulatory policy for LDTs, the creation of broad test utilization limits for diagnostic
products in general or requirements that Medicare patients pay for portions of clinical laboratory
tests or services received, could substantially impact the sales of our tests, increase costs and
divert managements attention from our business. For example, in 1989, the U.S. Congress passed
federal self-referral prohibitions commonly known as the Stark Law, significantly restricting,
regulating and changing laboratories relationships with physicians. In addition, sales of our
tests outside of the U.S. make us subject to foreign regulatory requirements, which may also change
over time.
We cannot predict whether future healthcare initiatives will be implemented at the federal or
state level, or the effect any future legislation or regulation will have on us. The taxes imposed
by the new federal legislation and the expansion in governments role in the U.S. healthcare
industry may result in decreased profits to us, lower reimbursements by payors for our products or
reduced medical procedure volumes, all of which may adversely affect our business, financial
condition and results of operations, possibly materially.
If third-party payors, including managed care organizations and Medicare, do not provide
reimbursement, breach, rescind or modify their contracts or reimbursement policies or delay
payments for our Oncotype DX tests, our commercial success could be compromised.
Physicians and patients may not order our Oncotype DX tests unless third-party payors, such as
managed care organizations as well as government payors such as Medicare and Medicaid, pay a
substantial portion of the test price. Reimbursement by a third-party payor may depend on a number
of factors, including a payors determination that tests using our technologies are:
|
|
|
not experimental or investigational, |
|
|
|
|
medically necessary, |
|
|
|
|
appropriate for the specific patient, |
|
|
|
|
cost-effective, |
|
|
|
|
supported by peer-reviewed publications, and |
|
|
|
|
included in clinical practice guidelines. |
There is uncertainty concerning third-party payor reimbursement of any test incorporating new
technology, including tests developed using our Oncotype DX platform. Several entities conduct
technology assessments of new medical tests and devices and provide the results of their
assessments for informational purposes to other parties. These assessments may be used by
third-party payors and health care providers as grounds to deny coverage for a test or procedure.
Although there are a number of favorable assessments of our Oncotype DX breast cancer test, the
test has received negative assessments in the past and our tests may receive negative assessments
in the future. For example, in April 2010, the Medical Advisory Panel of the Blue Cross and Blue
Shield Associations Technology Evaluation Center, a technology assessment group, published its
conclusion that the existing clinical data in support of our Oncotype DX breast cancer test did not
meet the panels technology criteria for clinical effectiveness and appropriateness for usage in
patients with N+ disease.
Since each payor makes its own decision as to whether to establish a policy to reimburse our
test, seeking these approvals is a time-consuming and costly process. To date, we have secured
policy-level reimbursement approval for our Oncotype DX breast cancer test for N-, ER+ patients
from a number of third-party payors. We cannot be certain that coverage for this test will be
provided
in the future by additional third-party payors or that existing reimbursement policies or
contracts or reimbursement levels will remain in place or be fulfilled within existing terms and
provisions.
28
Following the reporting of clinical studies to support the use of our Oncotype DX breast
cancer test in patients with N+, ER+ disease, we experienced an increase in usage for N+ patients.
We may not be able to obtain reimbursement coverage for our test for breast cancer patients with
N+, ER+ disease that is similar to the coverage we have obtained for early stage N-, ER+ patients.
We have not obtained reimbursement coverage from third-party payors in the U.S. for our
Oncotype DX colon cancer test launched in January 2010, and we just recently obtained reimbursement
coverage for the test with a payor in Israel. We expect to focus substantial resources on obtaining
adoption of and reimbursement coverage for this test. Because it is new, our Oncotype DX colon
cancer test may be considered investigational by payors and therefore may not be covered under
their reimbursement policies. We believe it may take several years to achieve reimbursement with a
majority of third-party payors. However, we cannot predict whether, or under what circumstances,
payors will reimburse for our test. If we fail to establish broad adoption of and reimbursement for
our Oncotype DX colon cancer test, our reputation could be harmed and our future prospects and our
business could suffer.
If we are unable to obtain reimbursement from private payors and Medicare and Medicaid
programs for our tests or new tests or test enhancements we may develop in the future, our ability
to generate revenues could be limited. We have in the past, and will likely in the future,
experience delays and temporary interruptions in the receipt of payments from third-party payors
due to contract implementation steps, documentation requirements and other issues, which could
cause our revenues to fluctuate from period to period.
The prices at which our tests are reimbursed may be reduced by Medicare and private and other
payors, and any such changes could have a negative impact on our revenues.
Even if we are being reimbursed for our tests, Medicare and private and other payors may
withdraw their coverage policies or cancel their contracts with us at any time, review and adjust
the rate of reimbursement or stop paying for our tests, which would reduce our total revenues. In
addition, insurers, including managed care organizations as well as government payors such as
Medicare and Medicaid, have increased their efforts to control the cost, utilization and delivery
of healthcare services. These measures have resulted in reduced payment rates and decreased
utilization for the clinical laboratory industry. From time to time, Congress has considered and
implemented changes to the Medicare fee schedules in conjunction with budgetary legislation, and
pricing for tests covered by Medicare is subject to change at any time. Reductions in the
reimbursement rate of payors have occurred and may occur in the future. Reductions in the prices at
which our tests are reimbursed could have a negative impact on our revenues.
If we are unable to obtain reimbursement for our tests outside of the U.S., our ability to expand
internationally will be compromised.
The majority of our international product revenues are currently generated by patient self-pay
and third party reimbursement for our Oncotype DX breast cancer test and through clinical
collaborations. In many countries outside of the U.S., various coverage, pricing and reimbursement
approvals are required. We expect that it will take several years to establish broad coverage and
reimbursement for our tests with payors in countries outside of the U.S., and our efforts may not
be successful. In addition, because we rely on distributors to obtain reimbursement for our tests,
to the extent we do not have direct reimbursement arrangements with payors, we may not be able to
retain reimbursement coverage with a particular payor if our agreement with a distributor is
terminated or expires.
Because of Medicare billing rules, we may not receive reimbursement for all tests provided to
Medicare patients.
Under current Medicare billing rules, claims for our Oncotype DX breast cancer tests performed
on Medicare beneficiaries who were hospital inpatients at the time the tumor tissue samples were
obtained and whose tests were ordered less than 14 days from discharge must be incorporated in the
payment that the hospital receives for the inpatient services provided. Medicare billing rules also
require hospitals to bill for the test when ordered for hospital outpatients less than 14 days
following the date of the hospital procedure where the tumor tissue samples were obtained.
Accordingly, we are required to bill individual hospitals for tests performed on Medicare
beneficiaries during these time frames. Because we generally do not have a written agreement in
place with these hospitals to purchase these tests, we may not be paid for our tests or may have to
pursue payment from the hospital on a case-by-case basis. We believe patients coming under this
rule represent approximately 2% of our total breast cancer testing population. We believe these
29
billing rules may lead to confusion regarding whether Medicare provides adequate reimbursement
for our breast cancer test, and could discourage Medicare patients from using our test. Although we
are working with Medicare and Congress, as well as with other diagnostic laboratories, to revise or
reverse these billing rules, we have no assurance that Medicare will do so or that Congress will
require Medicare to do so, and we also cannot ensure that hospitals will agree to arrangements to
pay us for Oncotype DX breast cancer tests performed on patients falling under these rules.
We depend on Medicare and a limited number of private payors for a significant portion of our
product revenues and if these or other payors stop providing reimbursement or decrease the amount
of reimbursement for our tests, our revenues could decline.
Reimbursement on behalf of patients covered by Medicare accounted for 20% of our product
revenues for both the three and six months ended June 30, 2010, and 20%, 22% and 23% of our product
revenues for the years ended December 31, 2009, 2008, and 2007, respectively. Reimbursement on
behalf of patients covered by United HealthCare Insurance Company accounted for 8% of our product
revenues for both the three and six months ended June 30, 2010, and 9%, 9% and 13% of our product
revenues for the years ended December 31, 2009, 2008 and 2007, respectively. While there were no
other third-party payors with product revenues of 10% or more for these periods, there have been in
the past, and may be in the future, other payors accounting for 10% or more of our product
revenues. Because the majority of stage II colon cancer patients in the U.S. are age 65 and over,
we may become more dependent on Medicare reimbursement in the future. It is possible that these or
other third-party payors that provide reimbursement for our test may suspend, revoke or discontinue
coverage at any time, or may reduce the reimbursement rates payable to us. Any such action could
have a negative impact on our revenues.
Our financial results depend on sales of one test, our Oncotype DX breast cancer test, and we
will need to generate sufficient revenues from this and other tests to run our business.
For the foreseeable future, we expect to derive substantially all of our revenues from sales
of one test, our Oncotype DX breast cancer test. We have been selling this test since January 2004.
While we launched our test for colon cancer in January 2010, we do not expect to recognize
significant revenues from this test until adoption of and reimbursement for this test have been
established. We are in various stages of research and development for other tests that we may offer
as well as for enhancements to our existing tests. We may not be able to successfully commercialize
tests for other cancers. If we are unable to increase sales of our breast cancer test, establish
adoption of and reimbursement for our colon cancer test, or successfully develop and commercialize
other tests or enhancements, our revenues and our ability to achieve sustained profitability would
be impaired.
If FDA were to begin regulating our tests, we could incur substantial costs and time delays
associated with meeting requirements for pre-market clearance or approval or we could experience
decreased demand for or reimbursement of our tests.
Clinical laboratory tests like ours are regulated under CLIA, as administered by CMS, as well
as by applicable state laws. Diagnostic kits that are sold and distributed through interstate
commerce are regulated as medical devices by FDA. Most LDTs are not currently subject to FDA
regulation, although reagents or software provided by third parties and used to perform LDTs may be
subject to regulation. We believe that our Oncotype DX tests are not diagnostic kits and also
believe that they are LDTs. As a result, we believe our tests should not be subject to regulation
under established FDA policies. The container we provide for collection and transport of tumor
samples from a pathology laboratory to our clinical reference laboratory may be a medical device
subject to FDA regulation but is currently exempt from pre-market review by FDA.
In January 2006, we received a letter from FDA regarding our Oncotype DX breast cancer test
inviting us to meet with FDA to discuss the nature and appropriate regulatory status of and the
least burdensome ways that we may fulfill any FDA pre-market review requirements that may apply. In
September 2006, FDA issued draft guidance on a new class of tests called In Vitro Diagnostic
Multivariate Index Assays, or IVDMIAs. Under this draft guidance, our tests could be classified as
either a Class II or a Class III medical device, which may require varying levels of FDA pre-market
review depending upon intended use and on the level of control necessary to assure the safety and
effectiveness of the test. In July 2007, FDA posted revised draft guidance that addressed some of
the comments submitted in response to the September 2006 draft guidance. The revised draft guidance
includes a transition period of FDA enforcement discretion of up to 18 months following release of
final guidance for currently marketed tests if the laboratory submits a pre-market review
submission within 12 months of the publication of final guidance. The comment period for this
revised guidance expired in October 2007.
30
In May 2007, FDA issued a guidance document Class II Special Controls Guidance Document: Gene
Expression Profiling Test System for Breast Cancer Prognosis. This guidance document was developed
to support the classification of gene expression profiling test systems for breast cancer prognosis
into Class II. In addition, in June 2007, FDA issued a guidance document Pharmacogenetic Tests and
Genetic Tests for Heritable Markers which provides recommendations to sponsors and FDA reviewers
in preparing and reviewing pre-market approval applications, or PMAs, and pre-market notification,
or 510(k), submissions for pharmacogenetic and other human genetic tests, whether testing is for
single markers or for multiple markers simultaneously (multiplex tests).
In June 2010, FDA announced a public meeting to discuss the agencys oversight of LDTs
prompted by the increased complexity of LDTs and their increasingly important role in clinical
decision making and disease management, particularly in the context or personalized medicine. FDA
indicated that it is considering a risk-based application of oversight to LDTs and that, following
public input and discussion, it may issue separate draft guidance on the regulation of LDTs which
may vary from the previously issued draft guidance on the regulation of in vitro diagnostic
multivariate index assays. The public meeting was held in July 2010.
In addition, the Secretary of the Department of Health and Human Services, or HHS, requested
that its Advisory Committee on Genetics, Health and Society make recommendations about the
oversight of genetic testing. A final report was published in April 2008. If the reports
recommendations for increased oversight of genetic testing were to result in further regulatory
burdens, it could have a negative impact on our business and could delay the commercialization of
tests in development.
We cannot provide any assurance that FDA regulation, including pre-market review, will not be
required in the future for our tests, whether through additional guidance issued by FDA,
new enforcement policies adopted by FDA or new legislation enacted by Congress. The
Kennedy-Eshoo Personalized Medicine Bill, which would create an Office of Personalized Medicine
with HHS to coordinate regulatory as well as reimbursement activities related to personalized
medicine technologies such as Oncotype DX, was introduced to the House of Representatives in June
2010. In addition, the Subcommittee on Oversight and Investigations of the Congressional Energy and
Commerce Committee held a hearing entitled Direct-To-Consumer Genetic Testing and the Consequences
to the Public Health, in July 2010, during which, in addition to a review of certain direct to
consumer tests, there was some commentary by FDA staff regarding the need for further regulation of
LDTs generally. It is possible that legislation will be enacted into law and may result in
increased regulatory burdens for us to continue to offer our tests or to develop and introduce new
tests.
If pre-market review is required, our business could be negatively impacted until such
review is completed and clearance to market or approval is obtained, and FDA could require that we
stop selling our tests pending pre-market clearance or approval. If our tests are allowed to remain
on the market but there is uncertainty about our tests, if they are labeled investigational by FDA,
or if labeling claims FDA allows us to make are very limited, orders or reimbursement may decline.
The regulatory approval process may involve, among other things, successfully completing additional
clinical trials and submitting a pre-market clearance notice or filing a PMA application with FDA.
If pre-market review is required by FDA, there can be no assurance that our tests will be cleared
or approved on a timely basis, if at all. Ongoing compliance with FDA regulations would increase
the cost of conducting our business, and subject us to inspection by and the requirements of
FDA and penalties for failure to comply with these requirements. We may also decide voluntarily to
pursue FDA pre-market review of our tests if we determine that doing so would be appropriate.
Should any of the reagents obtained by us from vendors and used in conducting our tests be
affected by future regulatory actions, our business could be adversely affected by those actions,
including increasing the cost of testing or delaying, limiting or prohibiting the purchase of
reagents necessary to perform testing.
If we were required to conduct additional clinical trials prior to continuing to sell our breast
and colon cancer tests or any other tests we may develop, those trials could lead to delays or
failure to obtain necessary regulatory approval, which could cause significant delays in
commercializing any future products and harm our ability to achieve sustained profitability.
If FDA decides to regulate our tests, it may require additional pre-market clinical testing
prior to submitting a regulatory notification or application for commercial sales. If we are
required to conduct pre-market clinical trials, whether using prospectively acquired samples or
archival samples, delays in the commencement or completion of clinical testing could significantly
increase our
31
test development costs and delay commercialization. Many of the factors that may cause
or lead to a delay in the commencement or
completion of clinical trials may also ultimately lead to delay or denial of regulatory
clearance or approval. The commencement of clinical trials may be delayed due to insufficient
patient enrollment, which is a function of many factors, including the size of the patient
population, the nature of the protocol, the proximity of patients to clinical sites and the
eligibility criteria for the clinical trial.
We may find it necessary to engage contract research organizations to perform data collection
and analysis and other aspects of our clinical trials, which might increase the cost and complexity
of our trials. We may also depend on clinical investigators, medical institutions and contract
research organizations to perform the trials properly. If these parties do not successfully carry
out their contractual duties or obligations or meet expected deadlines, or if the quality,
completeness or accuracy of the clinical data they obtain is compromised due to the failure to
adhere to our clinical protocols or for other reasons, our clinical trials may have to be extended,
delayed or terminated. Many of these factors would be beyond our control. We may not be able to
enter into replacement arrangements without undue delays or considerable expenditures. If there are
delays in testing or approvals as a result of the failure to perform by third parties, our research
and development costs would increase, and we may not be able to obtain regulatory clearance or
approval for our tests. In addition, we may not be able to establish or maintain relationships with
these parties on favorable terms, if at all. Each of these outcomes would harm our ability to
market our tests, or to achieve sustained profitability.
Complying with numerous regulations pertaining to our business is an expensive and time-consuming
process, and any failure to comply could result in substantial penalties
We are subject to CLIA, a federal law that regulates clinical laboratories that perform
testing on specimens derived from humans for the purpose of providing information for the
diagnosis, prevention or treatment of disease. CLIA is intended to ensure the quality and
reliability of clinical laboratories in the U.S. by mandating specific standards in the areas of
personnel qualifications, administration, and participation in proficiency testing, patient test
management, quality control, quality assurance and inspections. We have a current certificate of
accreditation under CLIA to perform testing. To renew this certificate, we are subject to survey
and inspection every two years. Moreover, CLIA inspectors may make random inspections of our
clinical reference laboratory.
We are also required to maintain a license to conduct testing in California. California laws
establish standards for day-to-day operation of our clinical reference laboratory, including the
training and skills required of personnel and quality control. In addition, our clinical reference
laboratory is required to be licensed on a product-specific basis by New York State. New York law
also mandates proficiency testing for laboratories licensed under New York state law, regardless of
whether or not such laboratories are located in New York. Moreover, several other states require
that we hold licenses to test specimens from patients in those states. Other states may have
similar requirements or may adopt similar requirements in the future. Finally, we may be subject to
regulation in foreign jurisdictions as we seek to expand international distribution of our tests.
If we were to lose our CLIA accreditation or California license, whether as a result of a
revocation, suspension or limitation, we would no longer be able to sell our tests, which would
limit our revenues and harm our business. If we were to lose our license in New York or in other
states where we are required to hold licenses, we would not be able to test specimens from those
states.
We are subject to other regulation by both the federal government and the states in which we
conduct our business, including:
|
|
|
Medicare billing and payment regulations applicable to clinical laboratories; |
|
|
|
|
the Federal Anti-kickback Law and state anti-kickback prohibitions; |
|
|
|
|
the federal physician self-referral prohibition, commonly known as the Stark Law, and the
state equivalents; |
|
|
|
|
the federal Health Insurance Portability and Accountability Act of 1996; |
|
|
|
|
the Medicare civil money penalty and exclusion requirements; and |
|
|
|
|
the Federal False Claims Act civil and criminal penalties and state equivalents. |
We have adopted policies and procedures designed to comply with these laws, including policies
and procedures relating to financial arrangements between us and physicians who refer patients to
us. In the ordinary course of our business, we conduct internal
32
reviews of our compliance with
these laws. Our compliance is also subject to governmental review. The growth of our business and
sales organization may increase the potential of violating these laws or our internal policies
and procedures. The risk of our being found in violation of these laws and regulations is further
increased by the fact that many of them have not been fully interpreted by the regulatory
authorities or the courts, and their provisions are open to a variety of interpretations. Any
action brought against us for violation of these laws or regulations, even if we successfully
defend against it, could cause us to incur significant legal expenses and divert our managements
attention from the operation of our business. If our operations are found to be in violation of any
of these laws and regulations, we may be subject to any applicable penalty associated with the
violation, including civil and criminal penalties, damages and fines, we could be required to
refund payments received by us, and we could be required to curtail or cease our operations. Any of
the foregoing consequences could seriously harm our business and our financial results.
New test development involves a lengthy and complex process, and we may be unable to
commercialize any of the tests we are currently developing.
We have multiple tests in early development and devote considerable resources to research and
development. For example, we are conducting early development studies in colon cancer for stage III
patients, prostate, renal cell and lung cancers. There can be no assurance that our technologies
will be capable of reliably predicting the recurrence of cancers other than breast and colon cancer
with the sensitivity and specificity necessary to be clinically and commercially useful, or that
our colon cancer test will result in a commercially successful product. In addition, before we can
develop diagnostic tests for new cancers and commercialize any new products, we will need to:
|
|
|
conduct substantial research and development; |
|
|
|
|
conduct validation studies; |
|
|
|
|
expend significant funds; and |
|
|
|
|
develop and scale our laboratory processes to accommodate different tests. |
This product development process involves a high degree of risk and may take several years.
Our product development efforts may fail for many reasons, including:
|
|
|
failure of the product at the research or development stage; |
|
|
|
|
difficulty in accessing archival tissue samples, especially tissue samples with known
clinical results; or |
|
|
|
|
lack of clinical validation data to support the effectiveness of the product. |
Few research and development projects result in commercial products, and success in early
clinical trials often is not replicated in later studies. At any point, we may abandon development
of a product candidate or we may be required to expend considerable resources repeating clinical
trials, which would adversely impact the timing for generating potential revenues from those
product candidates. In addition, as we develop products, we will have to make significant
investments in product development, marketing and selling resources. If a clinical validation study
fails to demonstrate the prospectively defined endpoints of the study, we might choose to abandon
the development of the product or product feature that was the subject of the clinical trial, which
could harm our business.
If we are unable to support demand for our tests, including successfully managing the evolution
of our technology and manufacturing platforms, our business could suffer.
As our test volume grows, we will need to continue to ramp up our testing capacity, implement
increases in scale and related processing, customer service, billing and systems process
improvements, and expand our internal quality assurance program, technology and manufacturing
platforms to support testing on a larger scale. We will also need additional certified laboratory
scientists and other scientific and technical personnel to process higher volumes of our tests. We
cannot assure you that any increases in scale, related improvements and quality assurance will be
successfully implemented or that appropriate personnel will be available. As our colon cancer test
and additional products are commercialized, we will need to bring new equipment on-line, implement
new systems, technology, controls and procedures and hire personnel with different qualifications.
Failure to implement necessary
33
procedures or to hire the necessary personnel could result in higher
cost of processing or an inability to meet market demand. There
can be no assurance that we will be able to perform tests on a timely basis at a level
consistent with demand, that our efforts to scale our commercial operations will not negatively
affect the quality of our test results, or that we will be successful in responding to the growing
complexity of our testing operations. If we encounter difficulty meeting market demand or quality
standards for our tests, our reputation could be harmed and our future prospects and our business
could suffer.
We may experience limits on our revenues if physicians decide not to order our tests.
If medical practitioners do not order our Oncotype DX tests or any future tests developed by
us, we will likely not be able to create demand for our products in sufficient volume for us to
achieve sustained profitability. To generate demand, we will need to continue to make oncologists,
surgeons and pathologists aware of the benefits of each type of test through published papers,
presentations at scientific conferences and one-on-one education by our sales force. In addition,
we will need to demonstrate our ability to obtain adequate reimbursement coverage from third-party
payors.
Prior to the inclusion of our Oncotype DX breast cancer test in clinical guidelines,
guidelines and practices regarding the treatment of breast cancer often recommended that
chemotherapy be considered in most cases, including many cases in which our test might indicate
that, based on our clinical trial results, chemotherapy would be of little or no benefit.
Accordingly, physicians may be reluctant to order a test that may suggest recommending against
chemotherapy in treating breast cancer. Moreover, our test provides quantitative information not
currently provided by pathologists and it is performed at our facility rather than by the
pathologist in a local laboratory, so pathologists may be reluctant to support our test. These
facts may make it difficult for us to convince medical practitioners to order our test for their
patients, which could limit our ability to generate revenues and achieve sustained profitability.
Our Oncotype DX colon cancer test predicts recurrence but, unlike our breast cancer test, does
not predict chemotherapy benefit. We will need to educate physicians, patients and payors about the
benefits and cost-effectiveness of our colon cancer test and to establish reimbursement
arrangements for this test with payors. We may need to hire additional scientific, technical and
other personnel to support this process. If our marketing and educational efforts do not result in
sufficient physician or patient demand, we may not be able to obtain adequate reimbursement for our
colon cancer test. If we fail to successfully establish adoption of and reimbursement for our colon
cancer test, our reputation could be harmed and our business could suffer.
We may experience limits on our revenues if patients decide not to use our tests.
Some patients may decide not to use our Oncotype DX tests due to their price, part or all of
which may be payable directly by the patient if the applicable payor denies reimbursement in full
or in part. Even if medical practitioners recommend that their patients use our tests, patients may
still decide not to use our tests, either because they do not want to be made aware of the
likelihood of recurrence or they wish to pursue a particular course of therapy regardless of test
results. Additionally, the current economic environment could continue to negatively impact
patients, resulting in loss of healthcare coverage, delayed medical checkups or inability to pay
for relatively expensive tests. If only a small portion of the patient population decides to use
our tests, we will experience limits on our revenues and our ability to achieve sustained
profitability.
If we are unable to develop products to keep pace with rapid technological, medical and
scientific change, our operating results and competitive position could be harmed.
In recent years, there have been numerous advances in technologies relating to the diagnosis
and treatment of cancer. For example, technologies in addition to ours now reportedly permit
measurement of gene expression in FPE tissue specimens. New chemotherapeutic or biologic strategies
are being developed that may increase survival time and reduce toxic side effects. There have also
been advances in methods used to analyze very large amounts of genomic information. These advances
require us to continuously develop new products and enhance existing products to keep pace with
evolving standards of care. Our tests could become obsolete unless we continually innovate and
expand our products to demonstrate recurrence and treatment benefit in patients treated with new
therapies. New treatment therapies typically have only a few years of clinical data associated with
them, which limits our ability to perform clinical studies and correlate sets of genes to a new
treatments effectiveness. If we are unable to demonstrate the applicability of our tests to new
treatments, sales of our test could decline, which would harm our revenues.
Our rights to use technologies licensed from third parties are not within our control, and we may
not be able to sell our products if we lose our existing rights or cannot obtain new rights on
reasonable terms.
34
We license from third parties technology necessary to develop our products. For example, we
license technology from Roche that we use to analyze genes for possible inclusion in our tests and
that we use in our clinical reference laboratory to conduct our tests. In return for the use of a
third partys technology, we may agree to pay the licensor royalties based on sales of our
products. Royalties are a component of cost of product revenues and impact the margin on our test.
We may need to license other technologies to commercialize future products. Our business may suffer
if these licenses terminate, if the licensors fail to abide by the terms of the license or fail to
prevent infringement by third parties, if the licensed patents or other rights are found to be
invalid or if we are unable to enter into necessary licenses on acceptable terms. Companies that
attempt to replicate our tests could be set up in countries that do not recognize our intellectual
property. Such companies could send test results into the U.S. and therefore reduce sales of our
tests.
If we are unable to maintain intellectual property protection, our competitive position could be
harmed.
Our ability to compete and to achieve sustained profitability is impacted by our ability to
protect our proprietary discoveries and technologies. We currently rely on a combination of patent
applications, copyrights, trademarks, and confidentiality, material data transfer, license and
invention assignment agreements to protect our intellectual property rights. We also rely upon
trade secret laws to protect unpatented know-how and continuing technological innovation. Our
intellectual property strategy is intended to develop and maintain our competitive position.
Patents may be granted to us jointly with other organizations, and while we may have a right of
first refusal, we cannot guarantee that a joint owner will not license rights to another party, and
cannot guarantee that a joint owner will cooperate with us in the enforcement of patent rights.
As of June 30, 2010, we had eight issued patents in the U.S. covering genes and methods that
are components of the Oncotype DX breast cancer test, five of which were issued jointly to us and
our collaborators, three Australian patents, one South African patent and one European patent for
methods used to determine gene expression, and a number of pending U.S. and international patent
applications. Our pending patent applications may not result in issued patents, and we cannot
assure you that our issued patents or any patents that might ultimately be issued by the U.S. Patent and Trademark Office, or USPTO, will
protect our technology. Any patents that may be issued to us might be challenged by third parties
as being invalid or unenforceable, or third parties may independently develop similar or competing
technology that avoids our patents. We cannot be certain that the steps we have taken will prevent
the misappropriation and use of our intellectual property, particularly in foreign countries where
the laws may not protect our proprietary rights as fully as in the U.S.
From time to time, the U.S. Supreme Court, other federal courts, the U.S. Congress or the
USPTO may change the standards of patentability and any such changes could have a negative impact
on our business. In addition, competitors may develop their own versions of our test in countries
where we did not apply for patents or where our patents have not issued and compete with us in
those countries, including encouraging the use of their test by physicians or patients in other
countries.
On October 30, 2008, the Court of Appeals for the Federal Circuit issued a decision that
methods or processes cannot be patented unless they are tied to a machine or involve a physical
transformation. The U.S. Supreme Court recently reversed that decision, finding that the
machine-or-transformation test is not the only test for determining patent eligibility. The
Court, however, declined to specify how and when processes are patentable. It is unclear at this
time whether the USPTO will amend its patent prosecution guidelines for
determining patentability. We cannot assure you that our patent portfolio will not be negatively
impacted by this decision.
A suit brought by multiple plaintiffs, including the American Civil Liberties Union, or ACLU,
against Myriad Genetics and the USPTO, could also impact biotechnology patents. That case involves
certain of Myriads U.S. patents related to the breast cancer susceptibility genes BRCA1 and BRCA2.
Related European patents were canceled in 2004 by the European Patent Office after opposition, and
a similar challenge is pending in Australia. The plaintiffs in the Myriad case filed motions for
summary judgment in the Southern District of New York requesting that the court, among other
things, find that the breast cancer genes are not patentable subject matter. We joined other
diagnostic companies in filing an amici brief in this case. The U.S. District Court for the
Southern District of New York filed an opinion on this case on March 20, 2010, finding that
Myriads BRCA sequence and sequence related claims are unpatentable under the Federal Circuit
machine or transformation test. Myriad has appealed this decision to the Federal Circuit, which
has been instructed by the Supreme Court to use broader patentability principles. It is unknown how
this case will be decided on appeal, whether this decision will have an indirect impact on gene
patents generally, or if this decision will have a significant impact on the ability of
biotechnology companies to obtain or enforce gene patents in the future.
35
Also, on February 5, 2010, the Secretarys Advisory Committee on Genetics, Health and Society
for HHS voted to approve a report entitled Gene Patents and Licensing Practices and Their Impact
on Patient Access to Genetic Tests. That report defines
patent claims on genes broadly to include claims to isolated nucleic acid molecules as well
as methods of detecting particular sequences or mutations. The report also contains six
recommendations, including the creation of an exemption from liability for infringement of patent
claims on genes for anyone making, using, ordering, offering for sale, or selling a test developed
under the patent for patient care purposes, or for anyone using the patent-protected genes in the
pursuit of research. In addition, the report recommended that the Secretary should explore,
identify, and implement mechanisms that will encourage more voluntary adherence to current
guidelines that promote non-exclusive in-licensing of diagnostic genetic and genomic technologies.
It is unclear whether these recommendations will be acted upon by the HHS, or if the
recommendations would result in a change in law or process that could negatively impact our patent
portfolio or future research and development efforts.
We may face intellectual property infringement claims that could be time-consuming and costly to
defend, and could result in our loss of significant rights and the assessment of treble damages.
We have received notices of claims of infringement and misappropriation or misuse of other
parties proprietary rights in the past and may from time to time receive additional notices. Some
of these claims may lead to litigation. We cannot assure you that we will prevail in such actions,
or that other actions alleging misappropriation or misuse by us of third-party trade secrets,
infringement by us of third-party patents and trademarks or the validity of our patents, will not
be asserted or prosecuted against us. We may also initiate claims to defend our intellectual
property or to seek relief on allegations that we use, sell, or offer to sell technology that
incorporates third party intellectual property. Intellectual property litigation, regardless of
outcome, is expensive and time-consuming, could divert managements attention from our business and
have a material negative effect on our business, operating results or financial condition. If there
is a successful claim of infringement against us, we may be required to pay substantial damages
(including treble damages if we were to be found to have willfully infringed a third partys
patent) to the party claiming infringement, develop non-infringing technology, stop selling our
tests or using technology that contains the allegedly infringing intellectual property or enter
into royalty or license agreements that may not be available on acceptable or commercially
practical terms, if at all. Our failure to develop non-infringing technologies or license the
proprietary rights on a timely basis could harm our business. In addition, revising our tests to
include the non-infringing technologies would require us to re-validate our tests, which would be
costly and time-consuming. Also, we may be unaware of pending patent applications that relate to
our tests. Parties making infringement claims on future issued patents may be able to obtain an
injunction that could prevent us from selling our tests or using technology that contains the
allegedly infringing intellectual property, which could harm our business.
It is possible that a third party or patent office might take the position that one or more
patents or patent applications constitute prior art in the field of genomic-based diagnostics. In
such a case, we might be required to pay royalties, damages and costs to firms who own the rights
to these patents, or we might be restricted from using any of the inventions claimed in those
patents.
If we are unable to compete successfully, we may be unable to increase or sustain our revenues or
achieve sustained profitability.
Our principal competition comes from existing diagnostic methods used by pathologists and
oncologists. These methods have been used for many years and are therefore difficult to change or
supplement. In addition, companies offering capital equipment and kits or reagents to local
pathology laboratories represent another source of potential competition. These kits are used
directly by the pathologist, which facilitates adoption more readily than tests like ours that are
performed outside the pathology laboratory. In addition, few diagnostic methods are as expensive as
our Oncotype DX tests.
We also face competition from many public and private companies that offer products or have
conducted research to profile genes, gene expression or protein expression in breast or colon
cancer, such as Agendia B.V., Almac Diagnostics, bioTheranostics, Celera Corporation, Clarient
Incorporated, Exagen Diagnostics, Foundation Medicine Inc., Hologic, Qiagen, Response Genetics Inc.
and University Genomics. We face competition from commercial laboratories with strong distribution
networks for diagnostic tests, such as Genzyme Corporation, Laboratory Corporation of America
Holdings and Quest Diagnostics Incorporated. Other potential competitors include companies that
develop diagnostic tests such as Roche Diagnostics, a division of Roche Holding Ltd, Siemens AG and
Veridex LLC, a Johnson & Johnson company, as well as other companies and academic and research
institutions. Our competitors may invent and commercialize technology platforms that compete with
ours. In December 2005, the federal government allocated a significant amount of funding to The
Cancer Genome Atlas, a project aimed at developing a comprehensive catalog of the genetic mutations
and other genomic changes that occur in cancers and maintaining the information in a free public
database. As more
36
information regarding cancer genomics becomes available to the public, we
anticipate that more products aimed at identifying targeted treatment options will be developed and
these products may compete with ours. In addition, competitors may develop their own
versions of our tests in countries where we did not apply for patents or where our patents
have not issued and compete with us in those countries, including encouraging the use of their test
by physicians or patients in other countries.
We have changed the list price of our breast cancer test in the past and we may change prices
for our tests in the future. Any increase or decrease in pricing could impact reimbursement of and
demand for our tests. Many of our present and potential competitors have widespread brand
recognition and substantially greater financial and technical resources and development, production
and marketing capabilities than we do. Others may develop lower-priced, less complex tests that
could be viewed by physicians and payors as functionally equivalent to our tests, which could force
us to lower the list prices of our tests and impact our operating margins and our ability to
achieve sustained profitability. Some competitors have developed tests cleared for marketing by
FDA. There may be a marketing differentiation or perception that an FDA-cleared test is more
desirable than Oncotype DX tests, and that may discourage adoption of and reimbursement for our
tests. If we are unable to compete successfully against current or future competitors, we may be
unable to increase market acceptance for and sales of our tests, which could prevent us from
increasing or sustaining our revenues or achieving sustained profitability and could cause the
market price of our common stock to decline.
Our research and development efforts will be hindered if we are not able to contract with third
parties for access to archival tissue samples.
Under standard clinical practice in the U.S., tumor biopsies removed from patients are
chemically preserved and embedded in paraffin wax and stored. Our clinical development relies on
our ability to secure access to these archived tumor biopsy samples, as well as information
pertaining to their associated clinical outcomes. Others have demonstrated their ability to study
archival samples and often compete with us for access. Additionally, the process of negotiating
access to archived samples is lengthy since it typically involves numerous parties and approval
levels to resolve complex issues such as usage rights, institutional review board approval, privacy
rights, publication rights, intellectual property ownership and research parameters. If we are not
able to negotiate access to archival tumor tissue samples with hospitals and clinical partners, or
if other laboratories or our competitors secure access to these samples before us, our ability to
research, develop and commercialize future products will be limited or delayed.
If we cannot maintain our current clinical collaborations and enter into new collaborations, our
product development could be delayed.
We rely on and expect to continue to rely on clinical collaborators to perform a substantial
portion of our clinical trial functions. If any of our collaborators were to breach or terminate
its agreement with us or otherwise fail to conduct the contracted activities successfully and in a
timely manner, the research, development or commercialization of the products contemplated by the
collaboration could be delayed or terminated. If any of our collaboration agreements are
terminated, or if we are unable to renew those agreements on acceptable terms, we would be required
to seek alternatives. We may not be able to negotiate additional collaborations on acceptable
terms, if at all, and these collaborations may not be successful.
In the past, we have entered into clinical trial collaborations with highly regarded
organizations in the cancer field including, for example, the National Surgical Adjuvant Breast and Bowel Project, or NSABP. Our success in the future depends
in part on our ability to enter into agreements with other leading cancer organizations. This can
be difficult due to internal and external constraints placed on these organizations. Some
organizations may limit the number of collaborations they have with any one company so as to not be
perceived as biased or conflicted. Organizations may also have insufficient administrative and
related infrastructure to enable collaborations with many companies at once, which can extend the
time it takes to develop, negotiate and implement a collaboration. Additionally, organizations
often insist on retaining the rights to publish the clinical data resulting from the collaboration.
The publication of clinical data in peer-reviewed journals is a crucial step in commercializing and
obtaining reimbursement for a test such as ours, and our inability to control when, if ever,
results are published may delay or limit our ability to derive sufficient revenues from any product
that may result from a collaboration.
From time to time we expect to engage in discussions with potential clinical collaborators
which may or may not lead to collaborations. However, we cannot guarantee that any discussions will
result in clinical collaborations or that any clinical studies which may result will be enrolled or
completed in a reasonable time frame or with successful outcomes. Once news of discussions
regarding possible collaborations are known in the medical community, regardless of whether the
news is accurate, failure to announce a collaboration agreement or the entitys announcement of a
collaboration with an entity other than us could result in adverse speculation about us, our
product or our technology, resulting in harm to our reputation and our business.
37
The loss of key members of our senior management team or our inability to retain highly skilled
scientists, clinicians and salespeople could adversely affect our business.
Our success depends largely on the skills, experience and performance of key members of our
executive management team and others in key management positions. The efforts of each of these
persons together will be critical to us as we continue to develop our technologies and testing
processes and as we transition to a company with more than one commercialized product. If we were
to lose one or more of these key employees, we may experience difficulties in competing
effectively, developing our technologies and implementing our business strategies.
Our research and development programs and commercial laboratory operations depend on our
ability to attract and retain highly skilled scientists and technicians, including geneticists,
licensed laboratory technicians, chemists, biostatisticians and engineers. We may not be able to
attract or retain qualified scientists and technicians in the future due to the competition for
qualified personnel among life science businesses, particularly in the San Francisco Bay Area. We
also face competition from universities and public and private research institutions in recruiting
and retaining highly qualified scientific personnel. In addition, our success depends on our
ability to attract and retain salespeople with extensive experience in oncology and close
relationships with medical oncologists, surgeons, pathologists and other hospital personnel. We may
have difficulties locating, recruiting or retaining qualified salespeople, which could cause a
delay or decline in the rate of adoption of our products. If we are not able to attract and retain
the necessary personnel to accomplish our business objectives, we may experience constraints that
could adversely affect our ability to support our research and development and sales programs. All
of our employees are at-will employees, which means that either we or the employee may terminate
their employment at any time.
If our sole laboratory facility becomes inoperable, we will be unable to perform our tests and
our business will be harmed.
We do not have redundant clinical reference laboratory facilities outside of Redwood City,
California. Redwood City is situated near earthquake fault lines. Our facility and the equipment we
use to perform our tests would be costly to replace and could require substantial lead time to
repair or replace. The facility may be harmed or rendered inoperable by natural or man-made
disasters, including earthquakes, flooding and power outages, which may render it difficult or
impossible for us to perform our tests for some period of time. The inability to perform our tests
or the backlog of tests that could develop if our facility is inoperable for even a short period of
time may result in the loss of customers or harm our reputation, and we may be unable to regain
those customers in the future. Although we possess insurance for damage to our property and the
disruption of our business, this insurance may not be sufficient to cover all of our potential
losses and may not continue to be available to us on acceptable terms, if at all.
In order to rely on a third party to perform our tests, we could only use another facility
with established state licensure and CLIA accreditation under the scope of which Oncotype DX tests
could be performed following validation and other required procedures. We cannot assure you that we
would be able to find another CLIA-certified facility willing to comply with the required
procedures, that this laboratory would be willing to perform the tests for us on commercially
reasonable terms, or that it would be able to meet our quality standards. In order to establish a
redundant clinical reference laboratory facility, we would have to spend considerable time and
money securing adequate space, constructing the facility, recruiting and training employees, and
establishing the additional operational and administrative infrastructure necessary to support a
second facility. We may not be able, or it may take considerable time, to replicate our testing
processes or results in a new facility. Additionally, any new clinical reference laboratory
facility opened by us would be subject to certification under CLIA and licensed by several states,
including California and New York, which could take a significant amount of time and result in
delays in our ability to begin operations.
We are dependent on our information technology and telecommunications systems, and any failure of
these systems could harm our business.
We depend on information technology, or IT, and telecommunications systems for significant
aspects of our operations. In addition, our third-party billing and collections provider is
dependent upon telecommunications and data systems provided by outside vendors and information it
receives from us on a regular basis. These IT and telecommunications systems support a variety of
functions, including test processing, sample tracking, quality control, customer service and
support, billing and reimbursement, research and development activities, and our general and
administrative activities. Failures or significant downtime of our IT or telecommunications systems
or those used by our third-party service providers could prevent us from processing tests,
providing test results to physicians, billing payors, processing reimbursement appeals, handling
patient or physician inquiries, conducting research
38
and development activities, and managing the
administrative aspects of our business. Any disruption or loss of IT or
telecommunications systems on which critical aspects of our operations depend could have an
adverse effect on our business and our product revenues.
We rely on a limited number of suppliers or, in some cases, a sole supplier, for some of our
laboratory instruments and materials and may not be able to find replacements in the event our
suppliers no longer supply that equipment or those materials, or those materials do not meet our
quality specifications.
We rely solely on Applied Biosystems, a division of Life Technologies Corporation, to supply
some of the laboratory equipment on which we perform our tests. We periodically forecast our needs
for laboratory equipment and enter into standard purchase orders with Applied Biosystems based on
these forecasts. We believe that there are relatively few equipment manufacturers other than
Applied Biosystems that are currently capable of supplying the equipment necessary for our Oncotype
DX platform. Even if we were to identify other suppliers, there can be no assurance that we will be
able to enter into agreements with such suppliers on a timely basis on acceptable terms, if at all.
If we should encounter delays or difficulties in securing from Applied Biosystems the quality and
quantity of equipment we require for our tests, we may need to reconfigure our test processes,
which would result in delays in commercialization or an interruption in sales. If any of these
events occur, our business and operating results could be harmed. Additionally, if Applied
Biosystems deems us to have become uncreditworthy, it has the right to require alternative payment
terms from us, including payment in advance. We are also required to indemnify Applied Biosystems
against any damages caused by any legal action or proceeding brought by a third party against
Applied Biosystems for damages caused by our failure to obtain required approval with any
regulatory agency.
We also rely on several sole suppliers for certain laboratory materials which we use to
perform our tests. While we have developed alternate sourcing strategies for these materials, we
cannot be certain that these strategies will be effective. If we should encounter delays or
difficulties in securing these laboratory materials, or if the materials do not meet our quality
specifications, delays in commercialization or an interruption in sales could occur.
We may be unable to manage our future growth effectively, which could make it difficult to
execute our business strategy.
Future growth will impose significant added responsibilities on management, including the need
to identify, recruit, train and integrate additional employees. In addition, rapid and significant
growth may place strain on our administrative and operational infrastructure, including customer
service and our clinical reference laboratory. Our ability to manage our operations and growth will
require us to continue to improve our operational, financial and management controls, reporting
systems and procedures. If we are unable to manage our growth effectively, it may be difficult for
us to execute our business strategy.
If we were sued for product liability or professional liability, we could face substantial
liabilities that exceed our resources.
The marketing, sale and use of our tests could lead to the filing of product liability claims
if someone were to allege that our tests failed to perform as it was designed. We may also be
subject to liability for errors in the test results we provide to physicians or for a
misunderstanding of, or inappropriate reliance upon, the information we provide. For example,
physicians sometimes order our Oncotype DX breast cancer test for patients who do not have the same
specific clinical attributes indicated on the report form as those for which the test provides
clinical experience information from validation studies. It is our practice to offer medical
consultation to physicians ordering our test for such patients, including patients with ER- breast
cancers. A product liability or professional liability claim could result in substantial damages
and be costly and time consuming for us to defend. Although we believe that our existing product
and professional liability insurance is adequate, we cannot assure you that our insurance would
fully protect us from the financial impact of defending against product liability or professional
liability claims. Any product liability or professional liability claim brought against us, with or
without merit, could increase our insurance rates or prevent us from securing insurance coverage in
the future. Additionally, any product liability lawsuit could cause injury to our reputation,
result in the recall of our products, or cause current clinical partners to terminate existing
agreements and potential clinical partners to seek other partners, any of which could impact our
results of operations.
If we use biological and hazardous materials in a manner that causes injury, we could be liable
for damages.
Our activities currently require the controlled use of potentially harmful biological
materials, hazardous materials and chemicals and may in the future require the use of radioactive
compounds. We cannot eliminate the risk of accidental contamination or injury to
39
employees or third
parties from the use, storage, handling or disposal of these materials. In the event of
contamination or injury, we
could be held liable for any resulting damages, and any liability could exceed our resources
or any applicable insurance coverage we may have. Additionally, we are subject on an ongoing basis
to federal, state and local laws and regulations governing the use, storage, handling and disposal
of these materials and specified waste products. The cost of compliance with these laws and
regulations may become significant and could negatively affect our operating results.
International expansion of our business exposes us to business, regulatory, political,
operational, financial and economic risks associated with doing business outside of the U.S.
Our business strategy incorporates international expansion, including establishing direct
sales and physician outreach and education capabilities outside of the U.S. and expanding our
relationship with distributors. Doing business internationally involves a number of risks,
including:
|
|
|
multiple, conflicting and changing laws and regulations such as tax laws, export and
import restrictions, employment laws, regulatory requirements and other governmental
approvals, permits and licenses; |
|
|
|
|
failure by us or our distributors to obtain regulatory approvals for the use of our tests
in various countries; |
|
|
|
|
difficulties in staffing and managing foreign operations; |
|
|
|
|
complexities associated with managing multiple payor reimbursement regimes or self-pay
systems; |
|
|
|
|
logistics and regulations associated with shipping tissue samples, including
infrastructure conditions and transportation delays; |
|
|
|
|
limits in our ability to penetrate international markets if we are not able to process
tests locally; |
|
|
|
|
financial risks, such as longer payment cycles, difficulty collecting accounts receivable
and exposure to foreign currency exchange rate fluctuations; |
|
|
|
|
natural disasters, political and economic instability, including wars, terrorism, and
political unrest, outbreak of disease, boycotts, curtailment of trade and other business
restrictions; and |
|
|
|
|
regulatory and compliance risks that relate to maintaining accurate information and
control over sales and distributors activities that may fall within the purview of the
Foreign Corrupt Practice Act, its books and records provisions or its anti-bribery
provisions. |
Any of these factors could significantly harm our future international expansion and
operations and, consequently, our revenues and results of operations.
Our dependence on distributors for foreign sales of our Oncotype DX tests could limit or prevent
us from selling our test in foreign markets and from realizing long-term international revenue
growth.
As of June 30, 2010, we had exclusive distribution agreements for our Oncotype DX breast
cancer test in 13 countries outside of the U.S., and we may enter into other similar arrangements
in other countries in the future. We intend to grow our business internationally, and to do so we
may need to attract additional distributors to expand the territories in which we sell our test.
Distributors may not commit the necessary resources to market and sell our test to the level of our
expectations. If current or future distributors do not perform adequately, or we are unable to
locate distributors in particular geographic areas, we may not realize long-term international
revenue growth. Regulatory requirements, costs of doing business outside of the U.S. and the
reimbursement process in foreign markets may also impact our revenues from international sales or
impact our ability to increase international sales in the future.
We may acquire other businesses or form joint ventures that could harm our operating results,
dilute our stockholders ownership, increase our debt or cause us to incur significant expense.
40
As part of our business strategy, we may pursue acquisitions of complementary businesses and
assets, as well as technology licensing arrangements. We also may pursue strategic alliances that
leverage our core technology and industry experience to expand our product offerings or
distribution. We have no experience with respect to acquiring other companies and limited
experience with respect to the formation of strategic alliances and joint ventures. If we make any
acquisitions, we may not be able to integrate these acquisitions successfully into our existing
business, and we could assume unknown or contingent liabilities. Any future acquisitions by us also
could result in significant write-offs or the incurrence of debt and contingent liabilities, any of
which could harm our operating results. Integration of an acquired company also may require
management resources that otherwise would be available for ongoing development of our existing
business. We may not identify or complete these transactions in a timely manner, on a
cost-effective basis, or at all, and we may not realize the anticipated benefits of any
acquisition, technology license, strategic alliance or joint venture.
To finance any acquisitions, we may choose to issue shares of our common stock as
consideration, which would dilute the ownership of our stockholders. If the price of our common
stock is low or volatile, we may not be able to acquire other companies for stock. The market price
of our common stock has been particularly volatile during the recent period of upheaval in the
capital markets and world economy, and may continue to be volatile in the future. Alternatively, it
may be necessary for us to raise additional funds for acquisitions through public or private
financings. Additional funds may not be available on terms that are favorable to us, or at all.
Our marketable securities are subject to risks that could adversely affect our overall financial
position.
We invest our cash in accordance with an established internal policy in instruments which
historically have been highly liquid and carried relatively low risk. However, with recent credit
market conditions, similar types of investments have experienced losses in value or liquidity
issues which differ from historical patterns. Should a portion of our marketable securities lose
value or have their liquidity impaired, it could adversely affect our overall financial position by
imperiling our ability to fund our operations and forcing us to seek additional financing sooner
than we would otherwise. Such financing, if available, may not be available on commercially
attractive terms.
Our inability to raise additional capital on acceptable terms in the future may limit our ability
to develop and commercialize new tests and technologies and expand our operations.
We expect capital outlays and operating expenditures to increase over the next several years
as we expand our infrastructure, commercial operations and research and development activities.
Specifically, we may need to raise capital to, among other things:
|
|
|
sustain commercialization of our Oncotype DX tests and enhancements to those tests; |
|
|
|
|
fund commercialization of any future tests we may develop; |
|
|
|
|
increase our selling and marketing efforts to drive market adoption and address
competitive developments; |
|
|
|
|
further expand our clinical laboratory operations; |
|
|
|
|
expand our technologies into other areas of cancer; |
|
|
|
|
expand our research and development activities; |
|
|
|
|
acquire, license or invest in technologies; |
|
|
|
|
acquire or invest in complementary businesses or assets; and |
|
|
|
|
finance capital expenditures and general and administrative expenses. |
Our present and future funding requirements will depend on many factors, including:
|
|
|
the rate of progress in establishing reimbursement arrangements with domestic and
international third-party payors; |
41
|
|
|
the cost of expanding our commercial and laboratory operations, including our selling and
marketing efforts; |
|
|
|
|
the rate of progress and cost of research and development activities associated with
expansion of our Oncotype DX breast and colon cancer tests; |
|
|
|
|
the rate of progress and cost of selling and marketing activities associated with
establishing adoption of and reimbursement for our Oncotype DX colon cancer test; |
|
|
|
|
the rate of progress and cost of research and development activities associated with
products in research and early development focused on cancers other than breast and colon
cancer; |
|
|
|
|
the cost of acquiring or achieving access to tissue samples and technologies; |
|
|
|
|
the cost of filing, prosecuting, defending and enforcing any patent claims and other
intellectual property rights; |
|
|
|
|
the effect of competing technological and market developments; |
|
|
|
|
costs related to international expansion; |
|
|
|
|
the cost and delays in product development as a result of any changes in regulatory
oversight applicable to our products or operations; and |
|
|
|
|
the economic and other terms and timing of any collaborations, licensing or other
arrangements into which we may enter or acquisitions we may seek to effect. |
If we raise funds by issuing equity securities, dilution to our stockholders could result. Any
equity securities issued also may provide for rights, preferences or privileges senior to those of
holders of our common stock. If we raise funds by issuing debt securities, these debt securities
would have rights, preferences and privileges senior to those of holders of our common stock. The
terms of debt securities issued or borrowings could impose significant restrictions on our
operations. If we raise funds through collaborations and licensing arrangements, we might be
required to relinquish significant rights to our technologies or products, or grant licenses on
terms that are not favorable to us. The credit markets and the financial services industry have
been experiencing a period of unprecedented turmoil and upheaval characterized by the bankruptcy,
failure, collapse or sale of various financial institutions and an unprecedented level of
intervention from the U.S. federal government. These events have generally made equity and debt
financing more difficult to obtain. Accordingly, additional equity or debt financing might not be
available on reasonable terms, if at all. If we are not able to secure additional funding when
needed, we may have to delay, reduce the scope of or eliminate one or more research and development
programs or selling and marketing initiatives. In addition, we may have to work with a partner on
one or more of our product or market development programs, which could lower the economic value of
those programs to our company.
We must implement additional and expensive finance and accounting systems, procedures and
controls as we grow our business and organization and to satisfy public company reporting
requirements, which will increase our costs and require additional management resources.
As a public reporting company, we are required to comply with the Sarbanes-Oxley Act of 2002
and the related rules and regulations of the Securities and Exchange Commission. Compliance with
Section 404 of the Sarbanes-Oxley Act and other requirements has increased our costs and required
additional management resources. We will need to continue to implement additional finance and
accounting systems, procedures and controls as we grow our business and organization and to satisfy
existing reporting requirements. If we fail to maintain or implement adequate controls, if we are
unable to complete the required Section 404 assessment as to the adequacy of our internal control
over financial reporting in future Form 10-K filings, or if our independent registered public
accounting firm is unable to provide us with an unqualified report as to the effectiveness of our
internal control over financial reporting in future Form 10-K filings, our ability to obtain
additional financing could be impaired. In addition, investors could lose confidence in the
reliability of our internal control over financial reporting and in the accuracy of our periodic
reports filed under the Exchange Act. A lack of investor confidence in the reliability and accuracy
of our public reporting could cause our stock price to decline.
42
We are subject to increasingly complex taxation rules and practices, which may affect how we
conduct our business and our results of operations.
As our business grows, we are required to comply with increasingly complex taxation rules and
practices. We are subject to tax in multiple U.S. tax jurisdictions and in foreign tax
jurisdictions as we expand internationally. The development of our tax strategies requires
additional expertise and may impact how we conduct our business. Our future effective tax rates
could be unfavorably affected by changes in, or interpretations of, tax rules and regulations in
the jurisdictions in which we do business, by lapses of the availability of the U.S. research and
development tax credit or by changes in the valuation of our deferred tax assets and liabilities.
Furthermore, we provide for certain tax liabilities that involve significant judgment. We are
subject to the examination of our tax returns by federal, state and foreign tax authorities, which
could focus on our intercompany transfer pricing methodology as well as other matters. If our tax
strategies are ineffective or we are not in compliance with domestic and international tax laws,
our financial position, operating results and cash flows could be adversely affected.
|
|
|
Exhibit |
|
|
Number |
|
Description |
31.1
|
|
Rule 13a-14(a) Certification of Chief Executive Officer. |
|
|
|
31.2
|
|
Rule 13a-14(a) Certification of Chief Financial Officer. |
|
|
|
32.1#
|
|
Statement of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. §1350). |
|
|
|
32.2#
|
|
Statement of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. §1350). |
|
|
|
# |
|
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the
certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form
10-Q and will not be deemed filed for purposes of Section 18 of the Exchange Act. |
43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
GENOMIC HEALTH, INC.
|
|
Date: August 9, 2010 |
By: |
/s/ Kimberly J. Popovits
|
|
|
|
Kimberly J. Popovits |
|
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
Date: August 9, 2010 |
By: |
/s/ G. Bradley Cole
|
|
|
|
G. Bradley Cole |
|
|
|
Chief Operating Officer and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer) |
|
44
GENOMIC HEALTH, INC.
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Description |
31.1
|
|
Rule 13a-14(a) Certification of Chief Executive Officer. |
|
|
|
31.2
|
|
Rule 13a-14(a) Certification of Chief Financial Officer. |
|
|
|
32.1#
|
|
Statement of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. §1350). |
|
|
|
32.2#
|
|
Statement of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act
of 2002 (18 U.S.C. §1350). |
|
|
|
# |
|
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the
certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form
10-Q and will not be deemed filed for purposes of Section 18 of the Exchange Act. |
45